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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________.
COMMISSION FILE NUMBER: 0-2222209
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PEREGRINE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-3773312
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or Number)
organization)
</TABLE>
12670 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
(Address of principal executive offices, including zip code)
(619) 481-5000
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES /X/ NO / /
The number of issued and outstanding shares of the Registrant's Common
Stock, $0.001 par value, as of September 30, 1997 was 17,175,094.
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PEREGRINE SYSTEMS, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
- --------- ----------------------------------------------------------------------- PAGE NO.
---------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1997
(unaudited)
and March 31, 1997................................................. 1
Condensed Consolidated Statements of Operations for the Three Months
Ended September 30, 1997 and 1996 and for the Six Months Ended
September 30, 1997 and 1996 (unaudited)............................ 2
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended
September 30, 1997 and 1996 (unaudited)............................ 3
Notes to Condensed Consolidated Financial Statements (unaudited)....... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................ 7
PART II. OTHER INFORMATION
- --------- -----------------------------------------------------------------------
Item 2. Changes in Securities and Use of Proceeds.............................. 19
Item 4. Submission of Matters to a Vote of Security Holders.................... 19
Item 6. Exhibits and Reports on Form 8-K....................................... 19
Signatures........................................................................ 20
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
MARCH 31, -------------
1997 (UNAUDITED)
-----------
(AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................................ $ 305 $ 16,754
Accounts receivable, net of allowance for doubtful accounts of
$220 and $452, respectively........................................................ 10,191 11,496
Financed receivables................................................................. 1,182 965
Deferred tax assets.................................................................. 1,752 337
Other current assets................................................................. 924 1,782
----------- -------------
Total current assets............................................................. 14,354 31,334
Property and equipment, net............................................................ 4,364 4,735
Goodwill............................................................................... -- 3,842
Other assets........................................................................... 1,020 432
----------- -------------
$ 19,738 $ 40,343
----------- -------------
----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank line of credit.................................................................. $ 1,974 $ 1,413
Accounts payable..................................................................... 916 2,556
Accrued expenses..................................................................... 6,079 9,371
Deferred revenue..................................................................... 8,419 8,028
Current portion of long-term debt.................................................... 497 719
Current portion of capital lease obligation.......................................... 364 146
Net liabilities of discontinued operation............................................ 170 --
----------- -------------
Total current liabilities........................................................ 18,419 22,233
Capital lease obligation, net of current portion....................................... -- 42
Long-term debt, net of current portion................................................. 1,395 1,052
Deferred revenue, net of current portion............................................... 2,773 2,956
----------- -------------
Total liabilities................................................................ 22,587 26,283
----------- -------------
Stockholders' Equity (Deficit):
Preferred stock, $0.001 par value, 5,000 shares authorized, no shares issued or
outstanding........................................................................ -- --
Common stock, $0.001 par value, 50,000 shares authorized, 12,920 and 17,175 shares
issued and outstanding, respectively............................................... 13 17
Additional paid-in capital........................................................... 15,081 63,852
Accumulated deficit.................................................................. (15,807) (47,384)
Unearned portion of deferred compensation............................................ (1,748) (1,602)
Cumulative translation adjustment.................................................... (388) (561)
Treasury stock, at cost.............................................................. -- (262)
----------- -------------
Total stockholders' equity (deficit)............................................. (2,849) 14,060
----------- -------------
$ 19,738 $ 40,343
----------- -------------
----------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
1
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PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Licenses........................................................ $ 4,096 $ 7,039 $ 7,856 $ 13,367
Maintenance and services........................................ 3,404 5,164 7,144 9,851
---------- ---------- ---------- ----------
Total revenues................................................ 7,500 12,203 15,000 23,218
---------- ---------- ---------- ----------
Costs and Expenses:
Cost of licenses................................................ 44 69 105 128
Cost of maintenance and services................................ 1,130 2,095 2,279 3,876
Sales and marketing............................................. 3,597 4,608 7,322 8,925
Research and development........................................ 1,385 1,659 2,800 3,303
General and administrative...................................... 878 1,169 1,685 2,312
Acquired in-process research and development costs.............. -- 34,775 -- 34,775
---------- ---------- ---------- ----------
Total costs and expenses...................................... 7,034 44,375 14,191 53,319
---------- ---------- ---------- ----------
Operating income (loss)........................................... 466 (32,172) 809 (30,101)
Interest income (expense), and other, net......................... (117) 226 (229) 404
---------- ---------- ---------- ----------
Income (loss) before income taxes................................. 349 (31,946) 580 (29,697)
Provision for income taxes........................................ -- 1,048 -- 1,880
---------- ---------- ---------- ----------
Net income (loss)................................................. $ 349 $ (32,994) $ 580 $ (31,577)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) per share....................................... $ 0.02 $ (2.20) $ 0.04 $ (2.14)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common and common equivalent
shares outstanding............................................... 14,330 15,001 14,330 14,777
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
2
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PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1997
--------- ----------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss)..................................................................... $ 580 $ (31,577)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization....................................................... 679 391
Charge for acquired in-process research and development............................. -- 34,775
Increase (decrease) in cash resulting from changes, net of business
acquired, in:
Accounts receivable................................................................. (677) (1,899)
Financed receivables................................................................ (915) 217
Deferred tax asset.................................................................. -- 1,415
Other current assets................................................................ (4) 7
Other assets........................................................................ (328) 588
Accounts payable.................................................................... (214) 893
Accrued expenses.................................................................... 694 (1,425)
Deferred revenue.................................................................... 343 (1,027)
--------- ----------
158 2,358
Net cash used by discontinued business.............................................. (692) (170)
--------- ----------
Net cash provided by (used in) operating activities............................... (534) 2,188
--------- ----------
Cash flows from investing activities:
Purchases of property and equipment................................................... (34) (280)
Proceeds from sale of product line.................................................... 700 --
Cash acquired in acquisition.......................................................... -- 582
--------- ----------
Net cash provided by investing activities........................................... 666 302
--------- ----------
Cash flows from financing activities:
Proceeds (repayment) on bank line of credit, net...................................... 1,207 (1,974)
Repayments of long-term debt.......................................................... (204) (1,683)
Issuance of common stock.............................................................. 2 18,269
Treasury stock purchased.............................................................. -- (262)
Principal payments under capital lease obligation..................................... (188) (218)
--------- ----------
Net cash provided by financing activities........................................... 817 14,132
--------- ----------
Effect of exchange rate changes on cash................................................. (217) (173)
--------- ----------
Net increase in cash.................................................................... 732 16,449
Cash and equivalents, beginning of period............................................... 437 305
--------- ----------
Cash and equivalents, end of period..................................................... $ 1,169 $ 16,754
--------- ----------
--------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.............................................................................. $ 229 $ 23
Income taxes.......................................................................... -- $ 567
Supplemental dislosure of non-cash investing and financing activities:
Stock issued and other non-cash consideration for acquisition......................... $ -- $ 38,617
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
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PEREGRINE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements have
been prepared by Peregrine Systems, Inc. (the "Company") and have not been
audited. These financial statements, in the opinion of management, include all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the financial position, results of operations and cash flows for
all periods presented. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K filed for the year ended March 31, 1997, which provides
further information regarding the Company's significant accounting policies and
other financial and operating information. The interim operating results
presented are not necessarily indicative of operating results for any subsequent
quarter or for the year ending March 31, 1998. The consolidated condensed
financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
NOTE 2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. The Company's
cash management and investment policies restrict investments to investment
quality, highly liquid securities.
NOTE 4. COMPUTATION OF NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during the periods. Common
equivalent shares are included in the per share calculations where the effect of
their inclusion would be dilutive. In March 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128), which changes the method of calculating
earnings per share. SFAS 128 is effective for financial statements issued after
December 15, 1997. The net income (loss) per share of the Company for the
periods ended September 30, 1997 and 1996 would not be materially different
under SFAS 128 as that presented herein.
As a result of the write-off of approximately $34.8 million for in-process
research and development, the Company reported a net loss for the three and six
month periods ended September 30, 1997. Accordingly, common stock equivalents of
3,240 were not included in the per share calculations for the three month and
six month periods ended September 30, 1997.
NOTE 5. INITIAL PUBLIC OFFERING
In April 1997, the Company offered and sold 2.3 million shares of its common
stock at an initial public offering price of $9.00 per share, raising $19.3
million after underwriting discounts and commissions.
4
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PEREGRINE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. LINE OF CREDIT
At March 31, 1997, the Company had a line of credit agreement which was
terminated in September 1997. The line of credit facility provided for maximum
borrowings of $4.5 million. The maximum available commitment was reduced by
outstanding letters of credit ($128,000 at March 31, 1997). Borrowings under the
agreement bore interest at the bank's prime rate (8.5% at March 31, 1997).
During the year ended March 31, 1997, the weighted average interest rate under
the agreement was approximately 8.4%, with interest only payable monthly. The
line of credit was personally guaranteed by the Company's majority stockholder
and was collateralized by the Company's accounts receivable, equipment, and
certain assets. All amounts outstanding under the line of credit were repaid in
April 1997, using proceeds received from the Company's initial public offering.
Effective July 1, 1997, the Company entered into an agreement to replace the
above line of credit facility with one which provides for maximum borrowings of
$5.0 million and expires on June 30, 1998. Borrowings under the line of credit
bear interest at the bank's prime rate (8.5% at September 30, 1997). The line of
credit is collateralized by the Company's accounts receivable, equipment, and
certain other assets. In addition, the credit agreement contains certain
covenants which, among other things, place certain restrictions on future
borrowings and acquisitions above specified levels. The Company is required to
maintain certain financial ratios and minimum equity balances. The agreement
also provides for a foreign exchange facility, under which the maximum principal
amount of foreign exchange transactions which may mature during any two day
period is $2.0 million.
At September 30, 1997, there were no amounts outstanding under the line of
credit facility. The outstanding line of credit balance at September 30, 1997 of
$1.4 million is entirely attributable to borrowings of the Company's wholly
owned subsidiary Apsylog S.A., acquired in September 1997 in connection with the
United Software, Inc. acquisition. In October 1997, the Apsylog line of credit
was repaid in full and terminated.
NOTE 7. ACQUISITION
On August 29, 1997, the Company's Board of Directors approved the
acquisition of Apsylog S.A., a French corporation based in Paris, France,
through the acquisition of all of the outstanding shares of United Software,
Inc., a Delaware corporation and the parent corporation of Apsylog. The
acquisition, which was completed September 19, 1997, was pursuant to an
Agreement and Plan of Reorganization dated effective as of August 29, 1997.
United Software, Inc. develops decision software solutions designed for asset
management. The consideration for the stock of United Software, Inc. included
1,916,213 shares of Peregrine Common Stock (including 32,021 shares of Common
Stock issuable upon exercise of outstanding options assumed by the Company, all
of which were fully vested at the time of the acquisition) valued at $15.92 per
share or $30,506,000 plus an additional $8,111,000 consisting of expenses
directly related to the acquisition and the assumption of net liabilities of
United Software, Inc.
The acquisition was accounted for as a purchase. Accordingly, the purchase
price was allocated to the net assets acquired based on their estimated fair
values, and the results of operations of United Software,
5
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PEREGRINE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. ACQUISITION (CONTINUED)
which were not significant, have been included from September 19, 1997. A
summary of the net assets acquired, after allocation of purchase price, at
September 19, 1997 is as follows (in thousands):
<TABLE>
<S> <C>
TANGIBLE ASSETS:
Current assets (including cash of approximately $582)............ $ 4,276
Property and equipment........................................... 335
---------
4,611
INTANGIBLE ASSETS:
Acquired in-process research and development..................... 34,775
Goodwill......................................................... 3,842
---------
38,617
---------
Total assets acquired.......................................... 43,228
Liabilities assumed................................................ 4,611
---------
Net assets acquired............................................ $ 38,617
---------
---------
</TABLE>
Acquired in-process research and development represents the present value of
the estimated cash flows expected to be generated by the United Software related
technology, which at the acquisition date had not yet reached the point of
technological feasibility and does not have an alternative future use.
Therefore, in accordance with generally accepted accounting principles, acquired
in-process research and development of $34,775,000 was written off and charged
to operations during the three and six month periods ended September 30, 1997.
The excess of the purchase price over the estimated fair value of net assets
acquired amounted to approximately $3.8 million, which has been accounted for as
goodwill and is being amortized over five years using the straight line method.
The accompanying consolidated statements of operations reflect the operating
results of United Software since September 19, 1997. Pro forma unaudited
consolidated operating results of the Company and United Software for the six
months ended September 30, 1996 and 1997 are summarized below (in thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
Revenue................................................................. $ 18,107 $ 27,697
Operating income (loss)................................................. (1,493) 2,563
Net income (loss)....................................................... (1,496) 1,077
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments such as the expensing of
additional goodwill amortization. However, they do not include the impact of the
write-off of $34.8 million of acquired in-process research and development
costs. They do not purport to be indicative of the results of operations that
actually would have resulted had the acquisitions been in effect on April 1,
1996 and 1997, or of future results of operations of the consolidated entities.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER
"FACTORS THAT MAY AFFECT FUTURE RESULTS" IN THIS "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS REPORT. THE FOLLOWING
DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
REPORT.
OVERVIEW
The Company develops, markets and supports SERVICECENTER, a suite of
software applications for managing the Enterprise Service Desk. The Company was
founded in 1981 primarily to provide consulting services for IT management
software. In 1987, the Company launched its first software product, PNMS, a
product designed to manage and monitor complex mainframe computer networks. In
1995, the Company commenced sales of SERVICECENTER, the Company's solution for
the Enterprise Service Desk. SERVICECENTER is currently available for the
Windows NT, UNIX and MVS platforms. Since the release of ServiceCenter in July
1995, SERVICECENTER has accounted for substantially all of the Company's license
revenues. In addition, for the year ended March 31, 1997, over 80% of the
Company's license sales of SERVICECENTER were attributable to UNIX and Windows
NT platforms.
In the latter half of fiscal 1996 and the beginning of fiscal 1997, the
Company implemented an internal restructuring to capitalize on the market
opportunity for products addressing the requirements of the Enterprise Service
Desk. This restructuring included rebuilding the Company's senior management
team, redefining the product development strategy, initiating a comprehensive
marketing strategy and strengthening the Company's financial and budgeting
processes. In addition, in April 1996, the Company substantially reorganized its
sales force and instituted new sales management procedures.
In September 1997, the Company acquired Apsylog S.A. ("Apsylog"), a French
corporation and wholly owned operating subsidiary of United Software, Inc., a
Delaware corporation ("United"), for a consideration consisting of approximately
1,916,213 shares of the Company's Common Stock, including 32,021 shares issuable
upon exercise of outstanding options held by employees and consultants of
Apsylog and assumed by the Company (the "Apsylog Acquisition"). The Company
accounted for the Apsylog Acquisition as a purchase transaction. The total
purchase price was $38.6 million, including $30.5 million of stock, $3.5 million
in transaction costs and costs associated with integrating the operations of the
two companies and $4.6 million of assumed liabilities. This purchase price of
$38.6 million was allocated based on the fair value of the acquired assets as
follows: $4.6 million to tangible assets, $34.8 million to in-process research
and development, which was written off, and $3.8 million as goodwill. The
goodwill is being amortized over five years using the straight line method.
The Company's revenues are derived from product licensing, maintenance and
services. License fees are generally due upon the granting of the license and
typically include a one-year maintenance period as part of the license
agreement. The Company also provides ongoing maintenance services, which include
technical support and product enhancements, for an annual fee typically based
upon the current price of the product. In fiscal 1995, 1996, and 1997,
maintenance and service revenues represented 53%, 51%, and 42% of total
revenues, respectively. The Company has sold its original PNMS software to a
sizable installed base of customers, many of whom have transitioned to
SERVICECENTER. The Company's large installed customer base has generated a high
level of maintenance revenues. In fiscal 1995, 1996, and 1997, more than 90% of
the Company's customers renewed their maintenance agreements. Maintenance
revenues from new licenses of SERVICECENTER combined with recurring maintenance
revenues from existing
7
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customers are expected to provide a continued source of revenues as the
Company's installed customer base increases.
Revenues from license agreements are recognized currently, provided that all
of the following conditions are met: a noncancelable license agreement or other
legally binding agreement has been signed, the product has been delivered, there
are no material uncertainties regarding customer acceptance, collection of the
resulting receivable is deemed probable, and no other significant vendor
obligations exist. Revenues from post-contract support services are recognized
ratably over the term of the support period, generally one year. Maintenance
revenues which are bundled in license fees are unbundled and recognized
accordingly using vendor-specific evidence. Consulting revenues are primarily
related to implementation services most often performed on a time and material
basis under separate service agreements for the installation of the Company's
products. Revenues from consulting and training services are recognized as the
respective services are performed.
The Company currently derives substantially all of its license revenues from
the sale of SERVICECENTER and expects SERVICECENTER to account for a significant
portion of the Company's revenues for the foreseeable future. The Company's
future operating results are dependent upon continued market acceptance of
SERVICECENTER, including future enhancements, as well as market acceptance of
ASSETCENTER, Apsylog's asset management product. Factors adversely affecting the
pricing of, demand for, or market acceptance of, SERVICECENTER or ASSETCENTER,
such as competition or technological change, could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company conducts business overseas in a number of foreign currencies,
principally the British Pound, the Deutsche Mark and the French Franc. These
currencies have been relatively stable against the U.S. dollar for the past
several years. As a result, foreign currency fluctuations have not had a
significant impact on the Company's revenues or results of operations. Although
the Company currently derives no revenues from highly inflationary economies,
the Company is expanding its presence in international markets outside Europe,
including the Pacific Rim and Latin America, whose currencies have tended to
fluctuate more relative to the U.S. Dollar. There can be no assurance that
foreign currency exchange rates will not prove more volatile or that future
fluctuations in the value of foreign currencies will not have a material adverse
effect on the Company's business, operating results and financial condition.
Management has recently implemented a foreign exchange hedging program. The
Company manages currency risk using one-month forward-rate currency contracts.
Currency contracts are in accordance with SFAS 52 and receive hedge accounting
treatment. Accordingly, to the extent not properly hedged by obligations
denominated in local currencies, the Company's foreign operations remain subject
to the risks of future foreign currency fluctuations, and there can be no
assurances that the Company's hedging activities will adequately protect the
Company against such risks.
8
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
consolidated statements of operations data as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses........................................................ 54.6% 57.7% 52.4% 57.6%
Maintenance and services........................................ 45.4 42.3 47.6 42.4
--------- --------- --------- ---------
Total revenues.............................................. 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of licenses................................................ 0.6 0.6 0.7 0.6
Cost of maintenance and services................................ 15.0 17.1 15.2 16.7
Sales and marketing............................................. 48.0 37.7 48.8 38.4
Research and development........................................ 18.5 13.6 18.7 14.2
General and administrative...................................... 11.7 9.6 11.2 10.0
Acquired research and development costs......................... -- 285.0 -- 149.8
--------- --------- --------- ---------
Total costs and expenses.................................... 93.8 363.6 94.6 229.7
--------- --------- --------- ---------
Operating income................................................ 6.2 (263.6) 5.4 (129.7)
Interest income (expense), and other, net....................... (1.5) 1.8 (1.5) 1.8
Income (loss) before income taxes............................... 4.7 (261.8) 3.9 (127.9)
Income tax expense.............................................. -- 8.6 -- 8.1
--------- --------- --------- ---------
Net income...................................................... 4.7% (270.4)% 3.9% (136.0)%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
THREE MONTH AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
The Company's results of operations for the three month and six month
periods ended September 30, 1997 include results of operations for Apsylog
subsequent to September 19, 1997. The impact of Apsylog's operations on the
consolidated results of operations for the three and six months ended September
30, 1997 was de minimus.
REVENUES
Total revenues were $12.2 million and $7.5 million in the second quarter of
fiscal 1998 and 1997, respectively, representing a period-to-period increase of
63%. For the six month periods ended September 1997 and 1996, total revenue
increased 55% from $15.0 million to $23.2 million.
LICENSES. License revenues were $7.0 million and $4.1 million in the second
quarter of fiscal 1998 and 1997, respectively, representing 58% and 55% of total
revenues in the respective periods and $13.4 million and $7.9 million for the
six months ended September 30, 1997 and 1996, respectively, representing 58% and
52% of total revenues for such periods. License revenues increased 72% in the
second quarter of fiscal 1998 compared to the second quarter of fiscal 1997. For
the six months September 30, 1997, license revenues increased 70% compared to
the six month period ended September 30, 1996. The dollar and percentage
increases in license revenues are attributable to increased demand for new
licenses of SERVICECENTER, additional seats purchased by existing SERVICECENTER
customers, more effective corporate marketing programs, improved sales force
productivity, and expansion of the Company's sales force.
MAINTENANCE AND SERVICES. Maintenance and services revenues were $5.2
million and $3.4 million in the second quarter of fiscal 1998 and 1997,
respectively, representing 42% and 45% of total revenues in the respective
periods and $9.9 million and $7.1 million for the six months ended September 30,
1997 and 1996, respectively, representing 42% and 48% of total revenues for such
periods. Maintenance and services revenues increased 52% in the second quarter
of fiscal 1998 compared to the second quarter of fiscal 1997.
9
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For the six months ended September 30, 1997, maintenance and service revenues
increased 38% compared to the six months ended September 30, 1996. The dollar
and percentage increases in maintenance and services revenues are attributable
to renewals of maintenance agreements from the Company's expanded installed base
of customers and maintenance revenues included as part of new licenses and an
increased number of consulting engagements related to implementation of software
from initial license agreements.
COSTS AND EXPENSES
COST OF LICENSES. Cost of license revenues was $69,000 and $44,000 in the
second quarter of fiscal 1998 and 1997, respectively, each representing 1% of
total license revenues in the respective periods and $128,000 and $105,000 for
the six month periods ended September 30, 1997 and 1996, respectively, again
representing 1% of total license revenues in the respective periods.
COST OF MAINTENANCE AND SERVICES. Cost of maintenance and services revenues
was $2.1 million and $1.1 million in the second quarter of fiscal 1998 and 1997,
respectively, representing 41% and 33% of total maintenance and service revenues
in the respective periods and $3.9 million and $2.3 million for the six months
ended September 30, 1997 and 1996, respectively, representing 39% and 32% of
total maintenance and services revenues for such periods, respectively. The
dollar increases in the second quarter of fiscal 1998 over 1997 and in the six
months ended September 30, 1997 over the same period in 1996 are attributable to
an increase in customer support and professional services personnel in
connection with the corresponding increase in professional services revenue.
SALES AND MARKETING. Sales and marketing expenses were $4.6 million and
$3.6 million in the second quarter of fiscal 1998 and 1997, respectively,
representing 38% and 48% of total revenues in the respective periods and $8.9
million and $7.3 million for the six months ended September 30, 1997 and 1996,
respectively, representing 38% and 49% of total revenues in such periods. The
dollar increases in sales and marketing expenses are attributable to the
increase in personnel in the marketing department and marketing spending and, to
a lesser extent, expansion of both the North American and international sales
forces and moderate operating expense increases. If the Company experiences a
decrease in sales force productivity or for any other reason a decline in
revenues, it is likely that operating margins will decline as well. The decrease
in sales and marketing expenses as a percentage of total revenues is
attributable to increased revenues, particularly increased license revenues,
economies of scale, and the delayed hiring of additional sales staff.
RESEARCH AND DEVELOPMENT. Research and development expenses were $1.7
million and $1.4 million in the second quarter of fiscal 1998 and 1997,
respectively, representing 14% and 19% of total revenues in the respective
periods, and $3.3 million and $2.8 million for the six months ended September
30, 1997 and 1996, respectively, representing 14% and 19% of total revenues in
such periods. The dollar increase from fiscal 1997 to fiscal 1998 is due
primarily to the hiring of additional software developers, and the decrease as a
percentage of total revenues is due to increased revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1.2
million and $0.9 million in the second quarter of fiscal 1998 and 1997,
respectively, representing 10% and 12% of total revenues in the respective
periods and $2.3 million and $1.6 million for the six months ended September 30,
1997 and 1996, respectively, representing 10% and 11% of the total revenues in
such period. The dollar increases from fiscal 1997 to 1998 are attributable
primarily to administrative personnel additions to support the Company's growth
and the additional administrative expenses associated with becoming a publicly
traded company, while the decrease as a percentage of total revenues reflects
the fact that revenues grew at a faster rate than general and administrative
expenses.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. Acquired in-process
research and development costs of $34.8 million were incurred in the second
quarter of fiscal 1998 in connection with the Apsylog Acquisition.
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The impact of the charge for acquired in-process research and development on
net earnings and earnings per share is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30, 1997 SIX MONTHS ENDED SEPT. 30, 1997
----------------------------------- -----------------------------------
NET BEFORE ACQUIRED R&D NET NET BEFORE ACQUIRED R&D NET
----------------------- ---------- ----------------------- ----------
<S> <C> <C> <C> <C>
Earnings (loss) before income taxes.... $ 2,829 $ (31,946) $ 5,078 $ (29,697)
Income taxes........................... $ 1,048 $ 1,048 $ 1,880 $ 1,880
-------- ---------- -------- ----------
Net earnings (loss).................... $ 1,781 $ (32,994) $ 3,198 $ (31,577)
Net earnings (loss) per share.......... $ 0.10 $ (2.20) $ 0.18 $ (2.14)
Shares used in computing eps........... 18,241 15,001 18,017 14,777
</TABLE>
- ------------------------
SEE NOTE 4 FOR ADDITIONAL DETAILS.
PROVISION FOR INCOME TAXES
Income taxes for the second fiscal quarter of 1998 amounted to $1.0 million
compared with zero in the comparable quarter of 1997. This increase results from
the $2.1 million dollar increase in operating profits, before taxes and
recognition of the acquired research and development costs during the period.
Excluding the effect of expensing the acquired research and development costs,
the effective tax rate for the second quarter of fiscal 1998 and for the six
months ended September 30, 1997 was 37%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $16.8 million in cash and cash equivalents at September 30,
1997 compared to $0.3 million at March 31, 1997. The increase is primarily
attributable to the Company's completion of its initial public offering in April
1997. The Company offered and sold 2.3 million shares of its Common Stock at an
initial public offering price of $9.00 per share, raising $19.3 million after
underwriting discounts and commissions.
At March 31, 1997, the Company had a $4.5 million revolving bank line of
credit scheduled to expire by its own terms November 30, 1997, and a term loan
from the same bank. The term loan was secured by trade receivables and fixed
assets of the Company, and the revolving credit line was secured by accounts
receivable, equipment and certain other assets of the Company. Both facilities
were personally guaranteed by the Company's majority stockholder. Both the
credit line and term loan were repaid from proceeds of the Company's April 1997
initial public offering, and the bank line of credit was subsequently
terminated.
Effective July 1, 1997, the Company entered into a new agreement to replace
the above line of credit. The new agreement allows up to $5.0 million in
borrowings and is generally secured by the same collateral as the old line.
There is no personal guarantee associated with the new line. There are however,
certain covenants, the most significant of which places certain restrictions on
future borrowings and acquisitions above specified levels. In addition, the
Company is required to maintain certain financial ratios and minimum equity
balances. The agreement also provides for a foreign exchange facility of up to
$2.0 million in any two day period.
At September 30, 1997, there were no amounts outstanding under the line of
credit facility. The outstanding line of credit balance at September 30, 1997 of
$1.4 million is entirely attributable to borrowings of the Company's wholly
owned subsidiary Apsylog S.A., acquired in September 1997 in connection with the
United Software, Inc. In October 1997, the Apsylog line of credit was repaid in
full and terminated.
The Company believes that its current cash balances, cash available under
its bank facilities and cash flow from operations will be sufficient to meet its
working capital requirements for at least the next 12 months. Although operating
activities may provide cash in certain periods, to the extent the Company
experiences growth in the future, the Company anticipates that its operating and
investing activities may
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<PAGE>
use cash. Consequently, any such future growth may require the Company to obtain
additional equity or debt financing, which may not be available on commercially
reasonable terms or which may be dilutive.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS REPORT, INCLUDING THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING
STATEMENT AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS. THESE
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THE FOLLOWING:
LIMITED PROFITABILITY; HISTORY OF OPERATING LOSSES. Through September 30,
1997, the Company has recorded cumulative net losses of approximately $47.4
million, including approximately $34.8 million related to the write-off of
acquired in-process research and development acquired in connection with the
Apsylog Acquisition. In recent years, the product lines of both the Company and
Apsylog have changed substantially. The Company's SERVICECENTER product, from
which the Company derived substantially all of its license revenues for the
fiscal year ended March 31, 1997 and for the six months ended September 30,
1997, only began shipping in mid-1995. Apsylog's ASSETCENTER product only began
shipping in mid-1996. As a result, prediction of the Company's future operating
results is difficult, if not impossible. Although the Company achieved
profitability during the year ended March 31, 1997 and for the six months ended
September 30, 1997 (excluding the impact of the $34.8 million charge related to
acquired in-process research and development acquired in connection with the
Apsylog Acquisition), there can be no assurance that the Company will be able to
remain profitable on a quarterly or annual basis. In addition, the Company does
not believe that the growth in revenues it has experienced in recent years is
indicative of future revenue growth or future operating results. See "--Product
Concentration; Dependence on Market Acceptance of Enterprise Service Desk
Software" and "--Risks Associated with Apsylog Acquisition and Future
Acquisitions."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY. The Company's
quarterly operating results have varied significantly in the past and may vary
significantly in the future depending upon a number of factors, many of which
are beyond the Company's control. These factors include, among others, the
ability of the Company to develop, introduce and market new and enhanced
versions of its software on a timely basis; market demand for the Company's
software; the size, timing and contractual terms of significant orders; the
timing and significance of new software product announcements or releases by the
Company or its competitors; changes in pricing policies by the Company or its
competitors; changes in the Company's business strategies; budgeting cycles of
its potential customers; changes in the mix of software products and services
sold; changes in the mix of revenues attributable to domestic and international
sales; the impact of acquisitions of competitors; the impact of acquisitions by
the Company, including the Apsylog Acquisition; seasonal trends; the
cancellations of licenses or maintenance agreements; product life cycles;
software defects and other product quality problems; and personnel changes. The
Company has often recognized a substantial portion of its revenues in the last
month or weeks of a quarter. As a result, license revenues in any quarter are
substantially dependent on orders booked and shipped in the last month or weeks
of that quarter. Due to the foregoing factors, quarterly revenues and operating
results are not predictable with any significant degree of accuracy. In
particular, the timing of revenue recognition can be affected by many factors,
including the timing of contract execution and delivery. The timing between
initial customer contact and fulfillment of criteria for revenue recognition can
be lengthy and unpredictable, and revenues in any given quarter can be adversely
affected as a result of such unpredictability. In the event of any downturn in
potential customers' businesses or the economy in general, planned purchases of
the Company's products may be deferred or canceled, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company's business has experienced and is expected to continue to
experience seasonality. The Company's revenues and operating results in its
December quarter typically benefit from purchase decisions made by the large
concentration of customers with calendar year-end budgeting requirements, while
revenues and operating results in the March quarter typically benefit from the
efforts of the Company's sales force to meet fiscal year-end sales quotas. In
addition, the Company is currently
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<PAGE>
attempting to expand its presence in international markets, including Europe,
the Pacific Rim and Latin America. International revenues comprise a significant
percentage of the Company's total revenues, and the Company may experience
additional variability in demand associated with seasonal buying patterns in
such foreign markets. In particular, the quarter ended September 30 tends to
reflect the effects of summer slowing of international business activity,
particularly in Europe. See "--International Operations; Currency Fluctuations."
PRODUCT CONCENTRATION; DEPENDENCE ON MARKET ACCEPTANCE OF ENTERPRISE SERVICE
DESK SOFTWARE. The Company currently derives substantially all of its license
revenues from the sale of SERVICECENTER and expects SERVICECENTER to account for
a significant portion of the Company's revenues for the foreseeable future. The
Company's future operating results are dependent upon continued market
acceptance of SERVICECENTER, including future enhancements, as well as market
acceptance of ASSETCENTER. Factors adversely affecting the pricing of, demand
for, or market acceptance of SERVICECENTER or ASSETCENTER, such as competition
or technological change, could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company's product strategy has focused on integrating a broad array of
IT management applications with other traditional internal help desk
applications to create an Enterprise Service Desk. The market for Enterprise
Service Desk software is relatively new and is characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards and changing customer requirements.
The Company's future financial performance will depend in part on continued
growth in the number of organizations implementing Enterprise Service Desk
solutions.
RISKS ASSOCIATED WITH APSYLOG ACQUISITION AND FUTURE ACQUISITIONS. The
Apsylog Acquisition involves a significant amount of integration of two
companies that have previously operated independently. The principal operations
of Apsylog, including most of its employees, are located in Paris, France. No
assurance can be given that difficulties will not be encountered in integrating
certain products, technologies or operations of Apsylog with those of the
Company or that the benefits expected from such integration will be realized or
that Apsylog employee morale will not be adversely affected by the integration
process. Such integration could result in a diversion of management's time and
attention, which could have a material adverse effect on revenues and results of
operations. The difficulties of integration may be increased by the necessity of
coordinating geographically separated organizations or of integrating personnel
with disparate business backgrounds and different corporate cultures. There can
be no assurance that either company will retain its key personnel, that the
engineering teams of Apsylog and the Company will successfully cooperate and
realize any technological benefits or that Apsylog or the Company will realize
any of the other anticipated benefits of the Apsylog Acquisition. Apsylog's
ASSETCENTER product has traditionally been sold into an organization's finance
or procurement departments as opposed to SERVICECENTER, which is typically
purchased by the IT Department. There can be no assurance that the Company will
be successful in continuing to sell to such constituencies or that it can
successfully persuade customers and potential customers that an integrated
approach to managing IT assets is desirable. In addition, the public
announcement and consummation of the Apsylog Acquisition could result in the
cancellation, termination or nonrenewal of arrangements with Apsylog by
suppliers, distributors or customers of Apsylog or the loss of certain key
Apsylog employees, or the termination of negotiations or delays in ordering by
prospective customers of Apsylog as a result of uncertainties associated with
the Apsylog Acquisition. Any significant amount of cancellations, terminations,
delays or nonrenewals of arrangements with Apsylog or loss of key employees or
termination of negotiations or delays in ordering could have a material adverse
effect on the business, operating results or financial condition of the Company.
Apsylog's success depends to a significant extent upon a limited number of
members of Apsylog's senior management, certain development personnel, and other
key Apsylog employees. Apsylog's future performance will also depend in
significant part upon the continued service of its key technical, sales and
senior management personnel following the Apsylog Acquisition. Only certain of
these individuals (including Apsylog's Chief Executive Officer and seven
additional employees) will be bound by non-
13
<PAGE>
competition agreements. In addition, in connection with the Apsylog Acquisition,
all repurchase restrictions on shares of restricted Apsylog Common Stock held by
Apsylog stockholders lapsed, and all unvested options in respect of Apsylog's
Common Stock vested and became immediately exercisable. The loss of the services
of one or more of Apsylog's executive officers, development personnel, or other
key employees or the decision of one or more of such officers or key employees
to join a competitor or otherwise compete directly or indirectly with the
Company could have a material adverse effect on the Company's business,
operating results and financial condition.
In addition to the Apsylog Acquisition and as part of its business strategy,
the Company may make acquisitions of, or significant investments in, businesses
that offer complementary products, services and technologies. There can be no
assurances that the Company will make any additional acquisitions in the future.
Any such future acquisitions or investments would present risks commonly
encountered in acquisitions of businesses. Such risks include, among others, the
difficulty of assimilating the technology, operations or personnel of the
acquired businesses, the potential disruption of the Company's on-going
business, the inability of management to maximize the financial and strategic
position of the Company through the successful incorporation of acquired
personnel, clients, or technologies, the maintenance of uniform standards,
controls, procedures, and policies and the impairment of relationships with
employees and clients as a result of any integration of new businesses and
management personnel. The Company expects that future acquisitions, if any,
could provide for consideration to be paid in cash, shares of stock or a
combination of cash and stock. In the event of such an acquisition or
investment, the factors described herein could have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO RECRUIT PERSONNEL. The Company's
ability to achieve anticipated revenues is substantially dependent on its
ability to attract and retain skilled personnel, especially sales, service and
implementation personnel. Other than certain employees of Apsylog, none of the
Company's employees, including its senior management, is bound by an employment
or non-competition agreement, and the Company does not maintain key man life
insurance on any employee. The loss of the services of one or more of the
Company's executive officers or key employees or the decision of one or more of
such officers or employees to join a competitor or otherwise compete directly or
indirectly with the Company could have a material adverse effect on the
Company's business, operating results and financial condition.
In addition, the Company believes that its future success will depend in
large part on its ability to attract and retain additional highly skilled
technical, sales, management and marketing personnel. Competition for such
personnel in the computer software industry is intense, and the Company has at
times in the past experienced difficulty in recruiting qualified personnel. New
employees hired by the Company generally require substantial training in the use
and implementation of the Company's products. In particular, a number of the
Company's sales personnel have been with the Company for only a limited period
of time. There can be no assurance that the Company will be successful in
attracting, training and retaining qualified personnel, and the failure to do so
could have a material adverse effect on the Company's business, operating
results and financial condition.
COMPETITION. The market for the Company's products is highly competitive,
fragmented and subject to rapid technological change and frequent new product
introductions and enhancements. Competitors vary in size and in the scope and
breadth of the products and services offered. The Company encounters competition
from a number of sources, including (i) providers of internal help desk software
applications such as Remedy Corporation and Software Artistry, Inc., (ii)
customer interaction software companies such as Clarify Inc. and The Vantive
Corporation, whose products include internal help desk applications, (iii)
information technology and systems management companies such as International
Business Machines Corporation, Computer Associates International, Inc., McAfee
Associates, Inc. and Hewlett-Packard Company through its recent acquisition of
PROLIN, (iv) providers of asset management software, and (v) the internal
information technology departments of those companies with help desk
requirements. Because barriers to entry in the software market are relatively
low, the Company anticipates additional
14
<PAGE>
competition from other established and emerging companies as the market for
Enterprise Service Desk applications expands. In addition, current and potential
competitors have established or may in the future establish cooperative
relationships among themselves or with third parties. The Company expects
software industry consolidation to occur in the future, and it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
have a material adverse effect on the Company's business, operating results and
financial condition. Some of the Company's current and many of its potential
competitors have significantly greater financial, technical, marketing and other
resources than the Company. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
to devote greater resources to the development, promotion and sale of their
products than the Company. There can be no assurance that the Company will be
able to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not have a material adverse
effect on the Company's business, operating results and financial condition.
MANAGEMENT OF GROWTH. The Company's business has grown substantially in
recent periods, with total revenues increasing from $19.6 million in fiscal 1995
to $23.8 million in fiscal 1996 and to $35.0 million in fiscal 1997 and to $23.2
million in the first six months of fiscal 1998. If the Company is successful in
achieving its growth plans, including the integration of Apsylog, such growth is
likely to place a significant burden on the Company's operating and financial
systems, resulting in increased responsibility for senior management and other
personnel within the Company. The Company's ability to compete effectively and
to manage future growth, if any, and its future operating results will depend in
part on the ability of its officers and other key employees to implement and
expand operational, customer support and financial control systems and to
expand, train and manage its employee base. In particular, in connection with
the Apsylog Acquisition, the Company will be required to integrate additional
personnel and to augment or replace Apsylog's existing financial and management
systems. Such integration could result in a disruption of operations of the
Company or Apsylog and could adversely affect the Company's financial results.
There can be no assurance that the Company's existing management or any new
members of management will be able to augment or improve existing systems and
controls or implement new systems and controls in response to future growth, if
any. The Company's failure to do so could have a material adverse effect on the
Company's business, operating results and financial condition. See "--Dependence
on Key Personnel; Ability to Recruit Personnel" and "--Risks Associated with
Apsylog Acquisition and Future Acquisitions."
LENGTHY SALES CYCLES. The license of the Company's software generally
requires the Company to engage in a sales cycle that typically takes
approximately six to nine months to complete. The length of the sales cycle may
vary depending on a number of factors over which the Company may have little or
no control, including the size of the transaction and the level of competition
which the Company encounters in its selling activities. In addition, the sales
cycle is typically extended 90 days for product sales through indirect channels.
During the sales cycle, the Company typically provides a significant level of
education to prospective customers regarding the use and benefits of the
Company's products. Any delays in the sale cycles of a large license or a number
of smaller licenses could have a material adverse effect on the Company's
business, operating results and financial condition. See "--Potential
Fluctuations in Quarterly Results; Seasonality."
EXPANSION OF DISTRIBUTION CHANNELS. The Company has historically sold its
products through its direct sales force and a limited number of distributors and
has provided maintenance and support services through its technical and customer
support staff. The Company is currently investing and intends to continue to
invest significant resources in developing additional sales and marketing
channels through system integrators and original equipment manufacturers
("OEMs') and other channel partners. There can be no assurance that the Company
will be able to attract channel partners that will be able to market the
Company's products effectively and will be qualified to provide timely and
cost-effective customer support
15
<PAGE>
and service. To the extent the Company establishes distribution through such
indirect channels, its agreements with channel partners may not be exclusive and
such channel partners may also carry competing product lines. Any failure by the
Company to establish and maintain such distribution relationships could have a
material adverse effect on the Company's business, operating results and
financial condition. See "--Management of Growth" and "--International
Operations; Currency Fluctuations."
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS. International sales
represented approximately 29% and 32% of the Company's total revenues in fiscal
1996 and fiscal 1997, respectively, and 33% for the six months ended September
30, 1997. The Company currently has international sales offices in London,
Paris, Frankfurt and Amsterdam. Apsylog currently has international offices in
Paris and Munich. The Company believes that its continued growth and
profitability will require continued expansion of its international operations,
particularly in Europe, Latin America and the Pacific Rim. Accordingly, the
Company intends to expand its international operations and enter additional
international markets, which will require significant management attention and
financial resources. In addition, the Company's international operations are
subject to a variety of risks associated with conducting business
internationally, including fluctuations in currency exchange rates, longer
payment cycles, difficulties in staffing and managing international operations,
problems in collecting accounts receivable, seasonal reductions in business
activity during the summer months in Europe and certain other parts of the
world, increases in tariffs, duties, price controls or other restrictions on
foreign currencies, and trade barriers imposed by foreign countries, any of
which could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the Company has only limited
experience in developing localized versions of its products and marketing and
distributing its products internationally. There can be no assurance that the
Company will be able to successfully localize, market, sell and deliver its
products internationally. The inability of the Company to expand its
international operations successfully and in a timely manner could have a
material adverse effect on the Company's business, operating results and
financial condition.
A significant portion of the Company's business is conducted in currencies
other than the U.S. dollar. Foreign currency transaction gains and losses
arising from normal business operations are credited to or charged against
earnings in the period incurred. As a result, fluctuations in the value of the
currencies in which the Company conducts its business relative to the U.S.
dollar have caused and will continue to cause currency transaction gains and
losses. Due to the substantial volatility of currency exchange rates, among
other factors, the Company cannot predict the effect of exchange rate
fluctuations upon future operating results. There can be no assurance that the
Company will not experience currency losses in the future. The Company has
recently implemented a foreign exchange hedging program, consisting principally
of purchases of one month forward-rate currency contracts. Notwithstanding such
a program, there can be no assurances that the Company's hedging activities will
adequately protect the Company against the risks associated with foreign
currency fluctuations. See "--Management of Growth."
YEAR 2000 IMPACT ON INFORMATION TECHNOLOGY BUDGETS. Many currently
installed computer systems and software products are coded to accept only two
digit entries in the date code field. These date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, in less than three years, computer systems and/or software used by
many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry concerning
the potential effects associated with such compliance.
The Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues. Many companies are expending
significant resources to correct their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
software products such as those offered by the Company.
16
<PAGE>
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT. The Company's
success is dependent upon proprietary technology. The Company relies primarily
on a combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect its proprietary rights. The
Company seeks to protect its software, documentation and other written materials
under trade secret and copyright laws, which provide only limited protection.
Despite precautions taken by the Company, it may be possible for unauthorized
third parties to copy aspects of its current or future products or to obtain and
use information that the Company regards as proprietary. In particular, the
Company may provide its licensees with access to its data model and other
proprietary information underlying its licensed applications. There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate or that the Company's competitors will not independently develop
similar or superior technology. Policing unauthorized use of the Company's
software is difficult and, while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be expected
to be a persistent problem. In addition, the laws of some foreign countries do
not protect the Company's proprietary rights to the same extent as do the laws
of the United States. Litigation may be necessary in the future to enforce the
Company's intellectual property rights, to protect the Company's trade secrets
or to determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company is not aware that any of its software product offerings
infringes the proprietary rights of third parties. There can be no assurance,
however, that third parties will not claim infringement by the Company with
respect to its current or future products. The Company expects that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect on the Company's business, operating
results and financial condition.
RAPID TECHNOLOGICAL CHANGE AND PRODUCT DEVELOPMENT RISKS. The market for
the Company's products is subject to rapid technological change, changing
customer needs, frequent new product introductions and evolving industry
standards that may render existing products and services obsolete. As a result,
the Company's position in its existing markets or other markets that it may
enter could be eroded rapidly by product advances. The life cycles of the
Company's products are difficult to estimate. The Company's growth and future
financial performance will depend in part upon its ability to enhance existing
applications, develop and introduce new applications that keep pace with
technological advances, meet changing customer requirements and respond to
competitive products. The Company's product development efforts are expected to
continue to require substantial investments by the Company. There can be no
assurance that the Company will have sufficient resources to make the necessary
investments. The Company has in the past experienced development delays, and
there can be no assurance that the Company will not experience such delays in
the future. There can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of new or enhanced products. In addition, there can be
no assurance that such products will achieve market acceptance, or that the
Company's current or future products will conform to industry requirements. The
inability of the Company, for technological or other reasons, to develop and
introduce new and enhanced products in a timely manner could have a material
adverse effect on the Company's business, operating results and financial
condition.
Software products as complex as those offered by the Company may contain
errors that may be detected at any point in a product's life cycle. The Company
has in the past discovered software errors in certain of its products and has
experienced delays in shipment of products during the period required to
17
<PAGE>
correct these errors. There can be no assurance that, despite testing by the
Company and by current and potential customers, errors will not be found,
resulting in loss of, or delay in, market acceptance and sales, diversion of
development resources, injury to the Company's reputation, or increased service
and warranty costs, any of which could have a material adverse effect on the
Company's business, results of operations and financial condition.
PRODUCT LIABILITY. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in the Company's license agreements may not be
effective under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims, and there can be no
assurance that the Company will not be subject to such claims in the future. A
product liability claim brought against the Company could have a material
adverse effect on the Company's business, operating results and financial
condition.
VOLATILITY OF STOCK PRICE. The Company completed its initial public
offering of Common Stock in April 1997, prior to which time no public market
existed for the Company's Common Stock. The market price of the Company's Common
Stock has been since the initial public offering and is expected to continue to
be subject to significant fluctuations in the future based on a number of
factors, including any shortfall in the Company's revenues or net income from
revenues or net income expected by securities analysts; announcements of new
products by the Company or its competitors; quarterly fluctuations in the
Company's financial results or the results of other software companies,
including those of direct competitors of the Company; changes in analysts'
estimates of the Company's financial performance, the financial performance of
competitors, or the financial performance of software companies in general;
general conditions in the software industry; changes in prices for the Company's
products or competitors' products; changes in revenue growth rates for the
Company or its competitors; sales of large blocks of Common Stock by holders
whose ability to sell has been limited by market stand-off agreements with the
underwriters of the Company's initial public offering and this offering or by
restrictions under applicable securities laws and conditions in the financial
markets. In addition, the stock market may from time to time experience extreme
price and volume fluctuations, which particularly affect the market price for
the securities of many technology companies and which have often been unrelated
to the operating performance of the specific companies. There can be no
assurance that the market price of the Company's Common Stock will not
experience significant fluctuations in the future.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
On September 19, 1997, the Company completed the acquisition of United
Software, Inc. ("United") pursuant to an Agreement and Plan of Reorganization
dated effective as of August 29, 1997. In connection with such acquisition, the
Company issued 1,916,213 (including 32,021 shares subject to outstanding options
assumed in connection with the Apsylog Acquisition) shares of its Common Stock
to the stockholders of United in reliance on the exemptions from the
registration requirements of the Securities Act of 1933, as amended, set forth
in Regulation S thereunder and in Section 4(2) of and Regulation D under the
Securities Act. Of the shares issued, approximately 1,588,861 shares were issued
in reliance on Regulation S and approximately 295,331 shares were issued in
reliance on Section 4(2)/Regulation D.
USE OF PROCEEDS
In April 1997 the Company completed the sale of 2,300,000 shares of Common
Stock at a per share price of $9.00 in a firm commitment underwritten initial
public offering pursuant to a Registration Statement on Form S-1 (Registration
No. 333-21483), which was declared effective on April 8, 1997. The Company's
managing underwriters for the April 1997 offering were UBS Securities LLC and
Oppenheimer & Co., Inc. Of the $20,700,000 in aggregate proceeds raised in
connection with the April 1997 offering, (i) $1,666,350 was paid to underwriters
in connection with underwriting discounts and (ii) approximately $650,000 was
paid by the Company in connection with expenses, including legal, printing and
filing fees, incurred in connection with the offering. There were no direct or
indirect payments to directors or officers of the Company or any other person or
entity. Following the completion of the offering, the Company repayed
indebtedness in an aggregate amount of $3,866,000 under an outstanding line of
credit and term loan, and following the Apsylog Acquisition, the Company repaid
an aggregate of $1.4 million of outstanding bank indebtedness of Apsylog. None
of the proceeds from the offering have been used for the construction of plant,
building or facility or the purchase of installation of machinery or equipment
or for purchases of real estate or the acquisition of other businesses. The
Company is currently investing the remaining net proceeds from the offering for
future use as additional working capital. Such remaining net proceeds have been
invested in highly liquid instruments with a maturity of three months or less. A
portion of those net proceeds may be used for the acquisition of businesses,
products and technologies that are complementary to those of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1997 Annual Meeting of Stockholders of the Company was held on August
12, 1997, at which time the following matters were acted upon:
<TABLE>
<CAPTION>
VOTES
VOTES WITHHELD/ BROKER
VOTES FOR AGAINST ABSTENTIONS NON-VOTES
---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
1. ELECTION OF DIRECTORS
John J. Moores............................................................ 13,882,543 -- 75,430 --
Christopher A. Cole....................................................... 13,715,243 -- 242,730 --
David A. Farley........................................................... 13,882,543 -- 75,430 --
Richard A. Hosley II...................................................... 13,882,543 -- 75,430 --
Alan H. Hunt.............................................................. 13,882,543 -- 75,430 --
Charles E. Noell III...................................................... 13,882,543 -- 75,430 --
Norris van den Berg....................................................... 13,882,543 -- 75,430 --
2. Ratification of Arthur Andersen LLP as independent accountants for the 13,954,158 -- 3,815 --
Company for the year ending March 31, 1998................................
</TABLE>
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE
- ----------- -------------------------------------------------------------------------------------
<C> <S>
4.2 Declaration of Registration Rights, dated September 19, 1997, concerning certain
registration rights granted by the Registrant in connection with the acquisition of
United Software, Inc.
10.8 Credit Agreement dated as of July 1, 1997 by and between the Registrant and Wells
Fargo Bank, N.A.
10.20 Special limited lease dated November 1, 1995 between Central Monceau and Apsylog S.A.
(translation from French original).
10.21 Lease dated January 19, 1995 between Central Monceau and Apsylog S.A. (translation
from French original).
21.1 List of Subsidiaries of the Registrant
27.1 Financial Data Schedule
</TABLE>
b) Reports on Form 8-K:
The Company filed no Current Reports on Form 8-K during the three months
ended September 30, 1997. The Company filed a Current Report on Form 8-K on
October 2, 1997 and a Current Report on Form 8-K/A on October 29, 1997 in
connection with its acquisition of United Software, Inc. The amended Current
Report on Form 8-K/A included the following financial statements (and notes
thereto) relating to such acquisition:
<TABLE>
<S> <C>
Consolidated Balance Sheets of United Software, Inc. as of December 31, 1995,
December 31, 1996, and June 30, 1997 (unaudited)
Consolidated Statements of Operations of United Software, Inc. for the years
ended December 31, 1995 and 1996 and for the six months ended June 30, 1996
and 1997 (unaudited)
Consolidated Statements of Stockholders' Deficit of United Software, Inc. for
the years ended December 31, 1995 and 1996 and for the six months ended June
30, 1997 (unaudited)
Consolidated Statements of Cash Flows of United Software, Inc. for the years
ended December 31, 1995 and 1996 and for the six months ended June 30, 1996
and 1997 (unaudited)
</TABLE>
The following unaudited pro forma combined financial statements (and notes
thereto) were also included in the Form 8-K/A:
<TABLE>
<S> <C>
Unaudited Pro Forma Combined Balance Sheet
Unaudited Pro Forma Combined Statement of Operations for the three months
ended June 30, 1997
Unaudited Pro Forma Combined Statement of Operations for the year ended March
31, 1997
</TABLE>
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized in the City of San Diego, California, this
4th day of November, 1997.
PEREGRINE SYSTEMS, INC.
By:_/s/ David A. Farley_______________
David A. Farley
Vice President, Finance, Chief
Financial Officer
(Principal Financial and Accounting
Officer)
21
<PAGE>
PEREGRINE SYSTEMS, INC.
DECLARATION OF REGISTRATION RIGHTS
This Declaration of Registration Rights ("Declaration") is made as of
September 19, 1997, by Peregrine Systems, Inc., a Delaware corporation
("Parent"), for the benefit of stockholders of United Software, Inc., a Delaware
corporation (the "Company"), acquiring shares of Parent Common Stock pursuant to
that Agreement and Plan of Reorganization dated effective as of August 29, 1997
(the "Reorganization Agreement"), among Parent, Company and French Acquisition
Corporation, a Delaware corporation and wholly-owned subsidiary of Parent
("Merger Sub"), and pursuant to the related Agreement of Merger (the "Agreement
of Merger") between the Company and Merger Sub and in consideration of such
stockholders' approving the Reorganization Agreement and the transactions
contemplated thereby.
12. DEFINITIONS. As used in this Declaration:
(a) "Effective Time" means the time of acceptance by the Delaware
Secretary of State of the Agreement of Merger.
(b) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(c) "Form S-3" means such form under the Securities Act as is in
effect on the date hereof or any registration form under the Securities Act
subsequently adopted by the SEC which similarly permits inclusion or
incorporation of substantial information by reference to other documents filed
by Parent with the SEC.
(d) "Holder" means: (i) a stockholder of the Company to whom shares
of Common Stock of Parent are issued pursuant to the Reorganization Agreement
and the Agreement of Merger, or (ii) the Escrow Agent (as defined in the
Reorganization Agreement), or (iii) a transferee to whom registration rights
granted under this Declaration are assigned pursuant to Section 9 of this
Declaration.
(e) "Registrable Securities" means for each Holder the number of
shares of Parent Common Stock issued to such Holder pursuant to the
Reorganization Agreement, in each case rounded to the nearest integral amount,
and for all Holders the sum of the Registrable Securities held by them;
PROVIDED, HOWEVER, that such shares of Parent Common Stock shall cease to be
Registrable Securities at such time as (i) they have been registered for resale
pursuant to a prospectus included in a Registration Statement on Form S-8/S-3
under the Securities Act or (ii) they are otherwise available for resale under
Rule 144 of the Securities Act.
(f) "Securities Act" means the Securities Act of 1933, as amended.
(g) "SEC" means the United States Securities and Exchange Commission.
<PAGE>
Terms not otherwise defined herein have the meanings given to them in the
Reorganization Agreement.
13. HOLDER REGISTRATION.
(a) Parent shall use its best efforts to cause the Registrable
Securities held by each Holder to be registered under the Securities Act so as
to permit the sale thereof, and in connection therewith shall prepare and file
with the SEC within forty-five (45) days following the Effective Time a
registration statement in such form as is then available under the Securities
Act covering that number of Registrable Securities as may be requested in
writing by the Holders at the Effective Time and in accordance with
Section 4.4(b) of the Reorganization Agreement; PROVIDED, HOWEVER, that each
Holder shall provide all such information and materials and take all such action
as may be required in order to permit Parent to comply with all applicable
requirements of the Securities Act, the Exchange Act, and of the SEC, and to
obtain any desired acceleration of the effective date of such registration
statement, such provision of information and materials to be a condition
precedent to the obligations of Parent pursuant to this Declaration to register
the Registrable Securities held by each such Holder. The offerings made
pursuant to such registration shall not be underwritten.
(b) Parent shall (i) prepare and file with the SEC the registration
statement in accordance with Section 2 hereof with respect to the Registrable
Securities and shall use its best efforts to cause such registration statement
to become effective as promptly as practicable after filing and to keep such
registration statement effective until the sooner to occur of (A) the date on
which all Registrable Securities included within such registration statement
have been sold or (B) the expiration of ninety (90) days after the day on which
such registration statement has been declared effective; (ii) prepare and file
with the SEC such amendments to such registration statement and amendments or
supplements to the prospectus used in connection therewith as may be necessary
to comply with the provisions of the Securities Act with respect to the sale or
other disposition of all securities registered by such registration statement;
(iii) furnish to each Holder such number of copies of any prospectus (including
any preliminary prospectus and any amended or supplemented prospectus) in
conformity with the requirements of the Securities Act, and such other
documents, as each Holder may reasonably request in order to effect the offering
and sale of the Registrable Securities to be offered and sold, but only while
Parent shall be required under the provisions hereof to cause the registration
statement to remain effective; (iv) use its best efforts to register or qualify
the Registrable Securities covered by such registration statement under the
securities or blue sky laws of such jurisdictions as each Holder shall
reasonably request (provided that Parent shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such jurisdiction where it has not
been qualified), and do any and all other acts or things which may be necessary
or advisable to enable each Holder to consummate the public sale or other
disposition of such Registrable Securities in such jurisdictions; and (v) notify
each Holder, promptly after it shall receive notice thereof, of the date and
time the registration statement and each post-effective amendment thereto has
become effective or a supplement to any prospectus forming a part of such
registration statement has been filed;
-2-
<PAGE>
3. UNDERWRITTEN SALE.
(a) On or before the 45th day after the Effective Time, Parent may
determine to provide for the firmly underwritten sale of Parent Common Stock for
its own account and/or the account of other stockholders, and in connection with
such determination, shall file on or before the 45th day after the Effective
Date with the SEC a registration statement to register such Common Stock (an
"Underwritten Sale"). In the event of such determination, Parent will promptly
give to each Holder written notice thereof, and will include in the Underwritten
Sale (and any related qualification under blue sky laws or other related
compliance) all the Registrable Securities specified by the Holders in their
notice to Parent in accordance with Section 4.4(b) of the Reorganization
Agreement, subject, however, to the marketing limitation set forth in this
Section 3. An Underwritten Sale, including the form of underwriting agreement
to be entered into by Parent, the underwriter(s) and any selling stockholders,
shall be on customary terms. The underwriter(s) for an Underwritten Sale shall
be selected by Parent in its sole discretion.
(b) The right of any Holder to registration pursuant to this Section
3 shall be conditioned upon such Holder's participation in the Underwritten Sale
and the inclusion of Registrable Securities in the Underwritten Sale to the
extent provided herein. All Holders shall (together with Parent and the other
holders distributing their securities through the Underwritten Sale) enter into
an underwriting agreement in customary form with the managing underwriter.
Notwithstanding any other provision of this Section 3, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the managing underwriter may limit the Registrable
Securities to be included in such registration to a minimum of 30% of the total
shares to be included in the Underwritten Sale, allocated among the Holders in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities requested to be included by such Holders in accordance with
Section 4.4(b) of the Reorganization Agreement. To facilitate the allocation of
shares in accordance with the above provision, Parent or the underwriters may
round the number of shares allocated to any Holder to the nearest 100 shares.
If any Holder disapproves of the terms of the Underwritten Sale, he or she may
elect to withdraw therefrom by written notice to Parent and the managing
underwriter.
(c) The completion by Parent of an Underwritten Sale in accordance
with the provisions of this Section 3 shall be in lieu of the registration
requirements under Section 2 above and shall relieve Parent of its obligation
under Section 2, provided that the registration statement for the Underwritten
Sale has been filed on or before the 45th day after the Effective Time and that
such Underwritten Sale has been completed on or before the 75th day after the
Effective Time. In addition, any withdrawal from or failure to participate in
the Underwritten Sale by a Holder or Holders shall also relieve Parent of its
obligations under Section 2. In the event of a determination by Parent to
proceed with an Underwritten Sale and such Underwritten Sale for any reason
shall not be completed on or before the 75th day after the Effective Time, the
obligations of Parent to the Holders under Section 2 above shall be unaffected,
with the exception that Parent shall have an additional ten days to complete the
preparation and filing of the registration statement required thereby.
-3-
<PAGE>
4. REGISTRATION ON FORM S-3.
(a) A Holder or Holders may request in writing that Parent file, at
any time after April 9, 1998 but before July 31, 1998, a registration statement
on Form S-3 (or any successor form to Form S-3) for a public offering of the
Registrable Securities, the reasonably anticipated aggregate price to the public
of which would exceed $3,000,000 (or any lesser amount if the aggregate number
of Registrable Securities to be included in such registration is not less than
200,000 shares). Parent shall use its best efforts to cause such Registrable
Securities to be registered for the offering on such form. Parent will
(i) promptly give written notice of the proposed registration to all other
Holders, and (ii) as soon as practicable, use its best efforts to effect such
registration as may be so requested and as would permit or facilitate the sale
and distribution of all or such portion of such Registrable Securities as are
specified in such request, together with all or such portion of the Registrable
Securities of any Holder or Holders joining in such request as are specified in
a written request received by Parent within fifteen (15) days after receipt of
such written notice from Parent. The substantive provisions of Section 2(b)
shall be applicable to the registration initiated under this Section 4(a), with
the exception that Parent shall have no obligation to maintain the effectiveness
of such registration beyond the first anniversary of the Effective Time.
(b) Notwithstanding the foregoing, Parent shall not be obligated to
take any action pursuant to this Section 4: (i) in any particular jurisdiction
in which Parent would be required to execute a general consent to service of
process in effecting such registration, qualification or compliance unless
Parent is already subject to service in such jurisdiction and except as may be
required by the Securities Act; (ii) if Parent shall furnish to the Holders a
certificate signed by the President of Parent stating that, in the good faith
judgment of the Board of Directors, it would be seriously detrimental to Parent
or its stockholders for registration statements to be filed in the near future,
then Parent's obligation to use its best efforts to file a registration
statement shall be deferred for a single period not to exceed forty-five (45)
days from the receipt of the request to file such registration by a Holder or
Holders; or (iii) in the event that Parent notifies the Holders that it has
determined, in consultation with legal counsel, that restrictions on transfer
are no longer applicable under United States securities laws and such
Registrable Securities are then freely tradeable.
5. SUSPENSION OF PROSPECTUS. Under any registration statement filed
pursuant to Section 2 or Section 4 hereof, Parent may restrict disposition of
Registrable Securities, and a Holder will not be able to dispose of such
Registrable Securities, if Parent shall have delivered a notice in writing to
such Holder stating that a delay in the disposition of such Registrable
Securities is necessary because Parent, in its reasonable judgment, has
determined that such sales would require public disclosure by Parent of material
nonpublic information that is not included in such registration statement. In
the event of the delivery of the notice described above by Parent, Parent shall
use its best efforts to amend such registration statement and/or amend or
supplement the related prospectus if necessary and to take all other actions
necessary to allow the proposed sale to take place as promptly as possible,
subject, however, to the right of Parent to delay further sales of Registrable
Securities until the conditions or circumstances referred to in the notice have
ceased to exist or have been disclosed. Such right to delay sales of
Registrable Securities shall not exceed thirty (30) days, and may not be
exercised by Parent more
-4-
<PAGE>
than once for each registration under Section 2 and Section 4. Any such
delay shall result in a corresponding extension of the period of time that
Parent is required to maintain the effectiveness of the registration
statement under Section 2 and Section 4.
6. EXPENSES. All of the out-of-pocket expenses incurred in connection
with any registration of Registrable Securities pursuant to this Declaration,
including, without limitation, all SEC, Nasdaq National Market and blue sky
registration and filing fees, printing expenses, transfer agents' and
registrars' fees, and the reasonable fees and disbursements of Parent's outside
counsel and independent accountants and a single counsel for all of the Holders,
shall be paid: (i) in respect of a registration under Section 2, one-half by
Parent and one-half by the Holders in the proportion of the Registrable
Securities included in such registration; (ii) in respect of an Underwritten
Sale under Section 3, by Parent; and (iii) in respect of a registration under
Section 4, by the Holders in the proportion of the Registrable Securities
included in such registration. Underwriting discounts and commissions shall be
paid by the Holders.
7. INDEMNIFICATION. In the event of any offering registered pursuant to
this Declaration:
(a) Parent will indemnify each Holder, each of its officers,
directors and partners and such Holder's legal counsel and independent
accountants, and each person controlling such Holder within the meaning of
Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Declaration, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages and liabilities (or actions in respect thereof), including any
of the foregoing incurred in settlement of any litigation, commenced or
threatened, arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any registration statement,
prospectus, offering circular or other document, or any amendment or supplement
thereto, incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they are made, not misleading, or any
violation by Parent of any rule or regulation promulgated under the Securities
Act, or state securities laws, or common law, applicable to Parent in connection
with any such registration, qualification or compliance, and will reimburse each
such Holder, each of its officers, directors and partners and such Holder's
legal counsel and independent accountants, and each person controlling such
Holder, each such underwriter and each person who controls any such underwriter,
for any legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, provided that Parent will not be liable in any such case to the extent
that any such claim, loss, damage, liability or expense arises out of or is
based in any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in conformity with written information
furnished to Parent in an instrument duly executed by such Holder or underwriter
and stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify
-5-
<PAGE>
Parent, each of its directors and officers and its legal counsel and
independent accountants, each underwriter, if any, of Parent's securities
covered by such a registration statement, each person who controls Parent or
such underwriter within the meaning of Section 15 of the Securities Act, and
each other such Holder, each of its officers and directors and each person
controlling such Holder within the meaning of Section 15 of the Securities
Act, against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse Parent, such Holders, such directors, officers, legal counsel,
independent accountants, underwriters or control persons for any legal or any
other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to Parent
by an instrument duly executed by such Holder and stated to be specifically
for use therein; provided, however, that the obligations of such Holders
hereunder shall be limited to an amount equal to the gross proceeds before
expenses and commissions to each such Holder of Registrable Securities sold
as contemplated herein.
(c) Each party entitled to indemnification under this Section 7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has written notice of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Declaration, except to the extent, but only to the
extent, that the Indemnifying Party's ability to defend against such claim or
litigation is impaired as a result of such failure to give notice. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to the Indemnified Party of a
release from all liability in respect to such claim or litigation.
(d) The obligations of Parent and each Holder under this Section 7
shall survive the completion of any offering of Registrable Securities in a
registration statement under this Declaration and otherwise.
(e) Notwithstanding the foregoing, to the extent the provisions of
this Section 7 are inconsistent with or conflict with the terms of any
underwriting, indemnification, selling or similar agreement entered into by a
Holder in connection with the offer and sale of Registrable Securities
-6-
<PAGE>
pursuant to a registration effected pursuant to this Declaration, the terms
of such agreement shall govern and shall supersede the provisions of this
Declaration.
8. REPORTS UNDER EXCHANGE ACT. Parent agrees to:
(a) use its commercially reasonable efforts to file with the SEC in a
timely manner all reports and other documents required of Parent under the
Securities Act and the Exchange Act; and
(b) furnish to each Holder, forthwith upon request (i) a written
statement by Parent that it has complied with the reporting requirements of the
Securities Act and the Exchange Act, or that it qualifies as a registrant whose
securities may be resold pursuant to Form S-3 (at any time after it so
qualifies), and (ii) a copy of the most recent annual or quarterly report of
Parent.
9. ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause Parent to
register Registrable Securities pursuant to this Declaration may be assigned by
a Holder to a transferee of Registrable Securities only if: (a) Parent is, prior
to such transfer, furnished with written notice of the name and address of such
transferee and the Registrable Securities with respect to which such
registration rights are being assigned and a copy of a duly executed written
instrument in form reasonably satisfactory to Parent by which such transferee
assumes all of the obligations and liabilities of its transferor hereunder and
agrees itself to be bound hereby; (b) immediately following such transfer the
disposition of such Registrable Securities by the transferee is restricted under
the Securities Act; and (c) such assignment includes all of the Registrable
Securities originally issued to the transferee, or such lesser amount if not
less than 10,000 shares of Registrable Securities; PROVIDED, HOWEVER, that such
10,000 share limitation shall not apply to transfers by a Holder to
shareholders, partners, retired partners of the Holder (including spouses and
ancestors, lineal descendants, and siblings of such partners or spouses who
acquire Registrable Securities by right, will, or intestate succession) if all
such transferees or assignees agree in writing to appoint a single
representative as their attorney-in-fact for the purpose of receiving any
notices and exercising their rights under this Declaration..
10. ESCROW SHARES. Shares of Parent Common Stock which are subject to the
Escrow in accordance with Article VIII of the Reorganization Agreement are
eligible for inclusion as registrable Securities hereunder, but only to the
extent that (i) the Holder agrees to remit all proceeds resulting from the sale
of such shares to the Escrow Agent as substitute collateral and (ii) the per
share amount of such proceeds is not less than the Parent Price Per Share.
11. AMENDMENT OF REGISTRATION RIGHTS. Holders of a majority of the
Registrable Securities from time to time outstanding may, with the consent of
Parent, amend the registration rights granted hereunder.
-7-
<PAGE>
12. THIRD PARTY BENEFICIARIES. It is intended that the stockholders of
the Company shall be third party beneficiaries to this Declaration.
PEREGRINE SYSTEMS, INC.
By: /s/ Alan H. Hunt
-------------------------------------
Alan H. Hunt
President and Chief Executive Officer
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CREDIT AGREEMENT
THIS AGREEMENT is entered into as of July 1, 1997, by and between PEREGRINE
SYSTEMS, INC., a Delaware corporation ("Borrower"), and WELLS FARGO BANK,
NATIONAL ASSOCIATION ("Bank").
RECITAL
Borrower has requested from Bank the credit accommodations described below
(each, a "Credit" and collectively, the "Credits"), and Bank has agreed to
provide the Credits to Borrower on the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Bank and Borrower hereby agree as follows:
ARTICLE I
THE CREDITS
SECTION 1.1. LINE OF CREDIT.
(a) LINE OF CREDIT. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time up
to and including July 31, 1998, not to exceed at any time the aggregate
principal amount of Five Million Dollars ($5,000,000.00) ("Line of Credit"),
the proceeds of which shall be used for working capital purposes. Borrower's
obligation to repay advances under the Line of Credit shall be evidenced by a
promissory note substantially in the form of Exhibit A attached hereto ("Line of
Credit Note"), all terms of which are incorporated herein by this reference.
(b) LETTER OF CREDIT SUBFEATURE. As a subfeature under the Line of
Credit, Bank agrees from time to time during the term thereof to issue Standby
letters of credit for the account of Borrower to finance inventory purchases
(each, a "Letter of Credit" and collectively, "Letters of Credit"); provided
however, that the form and substance of each Letter of Credit shall be subject
to approval by Bank, in its sole discretion; and provided further, that the
aggregate undrawn amount of all outstanding Letters of Credit shall not at any
time exceed Five Hundred Thousand Dollars ($500,000.00). Each Letter of Credit
shall be issued for a term not to exceed three hundred sixty-five (365) days, as
designated by Borrower; provided however, that no Letter of Credit shall have an
expiration date subsequent to the maturity date of the Line of Credit. The
undrawn amount of all Letters of Credit shall be reserved under the Line of
Credit and shall not be available for borrowings thereunder. Each Letter of
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Credit shall be subject to the additional terms and conditions of the Letter of
Credit Agreement and related documents, if any, required by Bank in connection
with the issuance thereof (each, a "Letter of Credit Agreement" and
collectively, "Letter of Credit Agreements"). Each draft paid by Bank under a
Letter of Credit shall be deemed an advance under the Line of Credit and shall
be repaid by Borrower in accordance with the terms and conditions of this
Agreement applicable to such advances; provided however, that if advances under
the Line of Credit are not available, for any reason, at the time any draft is
paid by Bank, then Borrower shall immediately pay to Bank the full amount of
such draft, together with interest thereon from the date such amount is paid by
Bank to the date such amount is fully repaid by Borrower, at the rate of
interest applicable to advances under the Line of Credit. In such event
Borrower agrees that Bank, in its sole discretion, may debit any demand deposit
account maintained by Borrower with Bank for the amount of any such draft.
(c) BORROWING AND REPAYMENT. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at any
time exceed the maximum principal amount available thereunder, as set forth
above.
SECTION 1.2. FOREIGN EXCHANGE FACILITY.
(a) FOREIGN EXCHANGE FACILITY. Subject to the terms and conditions of
this Agreement, Bank hereby agrees to make available to Borrower a facility (the
"Foreign Exchange Facility") under which Bank, from time to time up to and
including June 30, 1998, will enter into foreign exchange contracts for the
account of Borrower for the purchase and/or sale by Borrower in United States
dollars of Two Million; provided however, that the maximum amount of all
outstanding foreign exchange contracts shall not at any time exceed an aggregate
of Ten Million United States Dollars (US$10,000,000.00). No foreign exchange
contract shall be executed for a term in excess of twelve (12) months or for a
term which extends beyond July 31, 1998. Borrower shall have a "Delivery Limit"
under the Foreign Exchange Facility not to exceed at any time the aggregate
principal amount of Two Million United States Dollars (US$2,000,000.00), which
Delivery Limit reflects the maximum principal amount of Borrower's foreign
exchange contracts which may mature during any two (2) day period. All foreign
exchange transactions shall be subject to the additional terms of a Foreign
Exchange Agreement, substantially in the form of Exhibit B attached hereto
("Foreign Exchange Agreement"), all terms of which are incorporated herein by
this reference.
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(b) SETTLEMENT. Each foreign exchange contract under the Foreign Exchange
Facility shall be settled on its maturity date by Bank's debit to any demand
deposit account maintained by Borrower with Bank.
SECTION 1.3. INTEREST/FEES.
(a) INTEREST. The outstanding principal balance of the Line of Credit
shall bear interest at the rate of interest set forth in the Line of Credit
Note.
(b) COMPUTATION AND PAYMENT. Interest shall be computed on the basis of a
360-day year, actual days elapsed. Interest shall be payable at the times and
place set forth in the Line of Credit Note.
(c) COMMITMENT FEE. Borrower shall pay to Bank a non-refundable
commitment fee for the Line of Credit equal to Five Thousand Dollars
($5,000.00), which fee shall be due and payable in full upon the execution of
this Agreement.
(d) LETTER OF CREDIT FEES. Borrower shall pay to Bank (i) fees upon the
issuance of each Letter of Credit equal to one percent (1%) per annum (computed
on the basis of a 360-day year, actual days elapsed) of the face amount thereof,
and (ii) fees upon the payment or negotiation by Bank of each draft under any
Letter of Credit and fees upon the occurrence of any other activity with respect
to any Letter of Credit (including without limitation, the transfer, amendment
or cancellation of any Letter of Credit) determined in accordance with Bank's
standard fees and charges then in effect for such activity.
SECTION 1.4. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect
all interest and fees due under each Credit by charging Borrower's demand
deposit account number 4905-015277 with Bank, or any other demand deposit
account maintained by Borrower with Bank, for the full amount thereof. Should
there be insufficient funds in any such demand deposit account to pay all such
sums when due, the full amount of such deficiency shall be immediately due and
payable by Borrower.
SECTION 1.5. COLLATERAL.
As security for all indebtedness of Borrower to Bank Borrower hereby grants
to Bank security interests of first priority in all Borrower's accounts
receivable and other rights to payment [other than accounts sold to Sanwa
Business Credit pursuant to Purchase Agreement dated June 27, 1997, (the
"Purchase Agreement") with recourse to Borrower limited to warranty claims -
"Sold Accounts"], general intangibles, inventory and equipment.
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All of the foregoing shall be evidenced by and subject to the terms of such
security agreements, financing statements, deeds of trust and other documents as
Bank shall reasonably require, all in form and substance satisfactory to Bank.
Borrower shall reimburse Bank immediately upon demand for all costs and expenses
incurred by Bank in connection with any of the foregoing security, including
without limitation, filing and recording fees and costs of audits. Bank shall,
on the date of execution of this Agreement, provide Borrower with a written
estimate of all such costs and expenses incurred up to the date of execution of
this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Bank, which
representations and warranties shall survive the execution of this Agreement and
shall continue in full force and effect until the full and final payment, and
satisfaction and discharge, of all obligations of Borrower to Bank subject to
this Agreement.
SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and
existing and in good standing under the laws of the state of Delaware, and is
qualified or licensed to do business (and is in good standing as a foreign
corporation, if applicable) in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed
could have a material adverse effect on Borrower.
SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes, and
each other document, contract and instrument required hereby or at any time
hereafter delivered to Bank in connection herewith (collectively, the "Loan
Documents") have been duly authorized, and upon their execution and delivery in
accordance with the provisions hereof will constitute legal, valid and binding
agreements and obligations of Borrower or the party which executes the same,
enforceable in accordance with their respective terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any law
or regulation, or contravene any provision of the Articles of Incorporation or
By-Laws of Borrower, or result in any breach of or default under any contract,
obligation, indenture or other instrument to which Borrower is a party or by
which Borrower may be bound.
SECTION 2.4. LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any
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governmental authority, arbitrator, court or administrative agency which could
have a material adverse effect on the financial condition or operation of
Borrower other than those disclosed by Borrower to Bank in writing prior to the
date hereof.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement
of Borrower dated March 31, 1997, a true copy of which has been delivered by
Borrower to Bank prior to the date hereof, (a) is complete and correct and
presents fairly the financial condition of Borrower, (b) discloses all
liabilities of Borrower that are required to be reflected or reserved against
under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) has been prepared in accordance with
generally accepted accounting principles consistently applied. Since the date
of such financial statement there has been no material adverse change in the
financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a
security interest in or otherwise encumbered any of its assets or properties
except in favor of Bank, as otherwise permitted by Bank in writing; or as
otherwise permitted under this Agreement.
SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any
pending assessments or adjustments of its income tax payable with respect to any
year.
SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which Borrower is a party or by which Borrower may be
bound that requires the subordination in right of payment of any of Borrower's
obligations subject to this Agreement to any other obligation of Borrower.
SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter
possess, all permits, consents, approvals, franchises and licenses required and
rights to all trademarks, trade names, patents, and fictitious names, if any,
necessary to enable it to conduct the business in which it is now engaged in
compliance with applicable law.
SECTION 2.9. ERISA. Borrower is in compliance in all material respects
with all applicable provisions of the Employee Retirement Income Security Act of
1974, as amended or recodified from time to time ("ERISA"); Borrower has not
violated any provision of any defined employee pension benefit plan (as defined
in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no
Reportable Event as defined in ERISA has occurred and is continuing with respect
to any Plan initiated by Borrower; Borrower has met its minimum funding
requirements under ERISA with respect to each Plan; and each Plan will be able
to fulfill its benefit obligations as they come due in accordance with the
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Plan documents and under generally accepted accounting principles.
SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.
SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to
Bank in writing prior to the date hereof, Borrower is in compliance in all
material respects with all applicable federal or state environmental, hazardous
waste, health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, and the Federal Toxic Substances Control Act, as any of the same may be
amended, modified or supplemented from time to time. None of the operations of
Borrower is the subject of any federal or state investigation evaluating whether
any remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance into the environment.
Borrower has no material contingent liability in connection with any release of
any toxic or hazardous waste or substance into the environment.
ARTICLE III
CONDITIONS
SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation
of Bank to grant any of the Credits is subject to the fulfillment to Bank's
satisfaction of all of the following conditions:
(a) APPROVAL OF BANK COUNSEL. All legal matters incidental to the
granting of each of the Credits shall be satisfactory to Bank's counsel.
(b) DOCUMENTATION. Bank shall have received, in form and substance
satisfactory to Bank, each of the following, duly executed:
(i) This Agreement and the Notes.
(ii) Secretary's Certificate.
(iii) Certificate of Incumbency.
(iv) Articles of Incorporation.
(v) Foreign Exchange Agreement.
(vi) Security Agreement: Equipment.
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(vii) Continuing Security Agreement: Rights to Payment and
Inventory.
(viii) UCC Financing Statement.
(ix) Such other documents as Bank may require under any
other Section of this Agreement.
(c) FINANCIAL CONDITION. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower or any guarantor hereunder, nor any material decline, as determined by
Bank, in the market value of any collateral required hereunder or a substantial
or material portion of the assets of Borrower or any such guarantor.
(d) INSURANCE. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, in form, substance, amounts,
covering risks and issued by companies satisfactory to Bank, and where required
by Bank, with Bank named as additional insured.
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of
Bank to make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
(a) COMPLIANCE. The representations and warranties contained herein and
in each of the other Loan Documents shall be true on and as of the date of the
signing of this Agreement and on the date of each extension of credit by Bank
pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
Event of Default as defined herein, and no condition, event or act which with
the giving of notice or the passage of time or both would constitute such an
Event of Default, shall have occurred and be continuing or shall exist.
(b) DOCUMENTATION. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
ARTICLE IV
AFFIRMATIVE COVENANTS
Borrower covenants that so long as Bank remains committed to extend credit
to Borrower pursuant hereto, or any liabilities (whether direct or contingent,
liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents
remain outstanding, and until payment in full of all obligations of Borrower
subject hereto, Borrower shall, unless Bank otherwise consents in writing:
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SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest,
fees or other liabilities due under any of the Loan Documents at the times and
place and in the manner specified therein.
SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied,
and permit any representative of Bank, at any reasonable time, to inspect, audit
and examine such books and records, to make copies of the same, and to inspect
the properties of Borrower.
SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following,
in form and detail satisfactory to Bank:
(a) not later than 90 days after and as of the end of each fiscal year, a
an audited financial statement of Borrower, prepared by a certified public
accountant acceptable to Bank, to include a balance sheet, income statement,
statement of cash flow, together with all supporting schedules and footnotes;
(b) not later than 45 days after and as of the end of each fiscal quarter,
a financial statement of Borrower, prepared by Borrower, to include a balance
sheet and income statement;
(c) not later than 30 days prior to fiscal year end, company prepared
financial budgets;
(d) not later than fifteen (15) days after the end of each month, a
report, signed by Borrower's controller, disclosing all sales of Sold Accounts
under the Purchase Agreement, the gross amount of Sold Accounts and the net
sales proceeds received by Borrower (or the fact that there were no sales)
during the month just ended;
(e) not later than fifteen (15) days after and as of the end of each month,
a "flash" report of the company's total sales for the month then ended;
(f) from time to time such other information as Bank may reasonably
request.
SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's continued
existence and with the requirements of all laws, rules, regulations and orders
of any governmental authority applicable to Borrower and/or its business.
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SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the
types and in amounts customarily carried in lines of business similar to that of
Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting forth all
insurance then in effect.
SECTION 4.6. FACILITIES. Keep all properties useful or necessary to
Borrower's business in good repair and condition, and from time to time make
necessary repairs, renewals and replacements thereto so that such properties
shall be fully and efficiently preserved and maintained.
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any
and all indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and local
property taxes and assessments, except such (a) as Borrower may in good faith
contest or as to which a bona fide dispute may arise, and (b) for which Borrower
has made provision, to Bank's satisfaction, for eventual payment thereof in the
event Borrower is obligated to make such payment.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower which could have a material
adverse effect on the financial condition or operations of Borrower.
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial
condition as follows using generally accepted accounting principles consistently
applied and used consistently with prior practices (except to the extent
modified by the definitions herein):
(a) Tangible Net Worth not at any time less than $15,000,000.00, plus 100%
of net income in each fiscal quarter, with a deduction for expensed research and
development costs acquired in connection with mergers and acquisitions,
commencing with fiscal quarter ending September 30, 1997 (with no deduction for
losses), with "Tangible Net Worth" defined as equity less treasury stock and
less intangibles. For purposes of defining Tangible Net Worth, intangibles
shall include deferred tax benefits and shall exclude acquired capitalized
research and development costs arising as a result of mergers or acquisitions.
(b) Total Liabilities divided by Tangible Net Worth not at any time
greater than 1.5 to 1.0, with "Total Liabilities" defined as the aggregate of
current liabilities and non-current liabilities less subordinated debt, and with
"Tangible Net Worth" as defined above.
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(c) Quick Ratio not at any time less than 1.25 to 1.0, with "Quick Ratio"
defined as the aggregate of unrestricted cash, unrestricted marketable
securities and receivables convertible into cash divided by total current
liabilities.
(d) Net income after taxes not less than $1.00 on an annual basis,
determined as of each fiscal year end, and pre-tax profit not less than $1.00 on
a quarterly basis, determined as of each fiscal quarter end.
(e) Total Funded Debt to trailing four quarters EBITDA of not greater than
1.0 to 1.0, determined as of each fiscal quarter end, with "Funded Debt" defined
as the aggregate amount of all outstanding indebtedness of Borrower, excluding
accruals and trade payables and current liabilities incurred in the ordinary
course of business, and with "EBITDA" defined as net profit, plus interest,
income taxes, depreciation and amortization.
SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five
(5) days after the occurrence of each such event or matter) give written notice
to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or
any condition, event or act which with the giving of notice or the passage of
time or both would constitute an Event of Default; (b) any change in the name or
the organizational structure of Borrower; (c) the occurrence and nature of any
Reportable Event or Prohibited Transaction, each as defined in ERISA, or any
funding deficiency with respect to any Plan; or (d) any termination or
cancellation of any insurance policy which Borrower is required to maintain, or
any uninsured or partially uninsured loss through liability or property damage,
or through fire, theft or any other cause affecting Borrower's property.
ARTICLE V
NEGATIVE COVENANTS
Borrower further covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower will not without Bank's prior written
consent:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any of the Credits
except for the purposes stated in Article I hereof.
SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in
fixed assets in any fiscal year in excess of an aggregate of $2,000,000.00.
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SECTION 5.3. LEASE EXPENDITURES. Incur new operating lease expense in
any fiscal year in excess of an aggregate of $1,000,000.00.
SECTION 5.4. OTHER INDEBTEDNESS. Create, incur, assume or permit to
exist any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) the liabilities of Borrower to Bank,
(b) any other liabilities of Borrower existing as of, and disclosed to Bank
prior to, the date hereof, (c) to the extent not included in clause (b),
indebtedness incurred in the ordinary course of business for the purpose of
purchasing equipment and/or real estate not to exceed $2,000,000.00 outstanding
at any time, (d) subordinated indebtedness pursuant to subordination agreements
in form and content acceptable to Bank, (e) indebtedness assumed in connection
with mergers and consolidations permitted under Section 5.5, provided that
Borrower retire or refinance with Bank such indebtedness within 90 days of any
such merger or consolidation, and (f) extensions, modifications, refinancings
and refundings of the foregoing (subject to the restriction set forth in clause
(e)), so long as the maximum principal amount is not increased.
SECTION 5.5. MERGER, CONSOLIDATION. Merge into or consolidate with any
other entity unless (i) Borrower is the surviving entity, and (ii) no violation
of this Agreement exists at the time of or would exist after such merger or
consolidation; make any substantial change in the nature of Borrower's business
as conducted as of the date hereof; acquire all or substantially all of the
assets of any other entity except to the extent set forth in the last sentence
of this Section. Borrower shall not pay more than an aggregate of $10,000,000.00
during the term of the Line of Credit (in addition to payment in the form of its
equity securities) for all mergers with and acquisitions of stock in and/or all
or substantially all of the assets of other entities during such term.
SECTION 5.6. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to
or investments in any person or entity, except (a) any of the foregoing existing
as of, and disclosed to Bank prior to, the date hereof, (b) to the extent not
included in clause (a), loans or advances in amounts not to exceed an aggregate
of $100,000.00 outstanding at any one time, and (c) investments by means
of acquisitions of stock of other entities, subject to the last sentence of
Section 5.5 hereof.
SECTION 5.7 TRANSFER OF ASSETS. Not sell, lease, transfer or otherwise
dispose of all or a substantial or material portion of Borrower's assets except
in the ordinary course of its business, and except for sales under the Purchase
Agreement at such time(s) that no Event of Default exists under this
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Agreement, each of which sale shall not exceed 25% of Borrower's total accoounts
at the time of such sale.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal, interest, fees or
other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in connection
with, or any representation or warranty made by Borrower or any other party
under this Agreement or any other Loan Document shall prove to be incorrect,
false or misleading in any material respect when furnished or made.
(c) Any default in the performance of or compliance with any obligation,
agreement or other provision contained herein or in any other Loan Document
(other than those referred to in subsections (a) and (b) above), and with
respect to any such default which by its nature can be cured, such default shall
continue for a period of twenty (20) days from its occurrence.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under the terms of any contract or instrument (other
than any of the Loan Documents) pursuant to which Borrower has incurred any debt
or other liability to any person or entity, including Bank.
(e) The filing of a notice of judgment lien against Borrower; or the
recording of any abstract of judgment against Borrower in any county in which
Borrower has an interest in real property; or the service of a notice of levy
and/or of a writ of attachment or execution, or other like process, against the
assets of Borrower; or the entry of a judgment against Borrower.
(f) Borrower shall become insolvent, or shall suffer or consent to or
apply for the appointment of a receiver, trustee, custodian or liquidator of
itself or any of its property, or shall generally fail to pay its debts as they
become due, or shall make a general assignment for the benefit of creditors;
Borrower shall file a voluntary petition in bankruptcy, or seeking
reorganization, in order to effect a plan or other arrangement with creditors or
any other relief under the Bankruptcy Reform Act, Title 11 of the United States
Code, as amended or recodified from time to time ("Bankruptcy Code"), or under
any state or federal law granting relief to debtors, whether now or hereafter in
effect; or any involuntary petition or proceeding pursuant to the Bankruptcy
Code or any other
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applicable state or federal law relating to bankruptcy, reorganization or other
relief for debtors is filed or commenced against Borrower, or Borrower shall
file an answer admitting the jurisdiction of the court and the material
allegations of any involuntary petition; or Borrower shall be adjudicated a
bankrupt, or an order for relief shall be entered against Borrower by any court
of competent jurisdiction under the Bankruptcy Code or any other applicable
state or federal law relating to bankruptcy, reorganization or other relief for
debtors.
(g) There shall exist or occur any event or condition which Bank in good
faith believes impairs, or is substantially likely to impair, the prospect of
payment or performance by Borrower of its obligations under any of the Loan
Documents.
(h) The dissolution or liquidation of Borrower; or any of its directors,
stockholders or members, shall take action seeking to effect the dissolution or
liquidation of Borrower.
SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default:
(a) all indebtedness of Borrower under each of the Loan Documents, any term
thereof to the contrary notwithstanding, shall at Bank's option and, without
notice in case of an Event of Default under Section 6.1(f), and upon 5 calendar
days' prior written notice in all other cases, become immediately due and
payable without presentment, demand, protest or notice of dishonor, all of which
are hereby expressly waived by each Borrower; (b) the obligation, if any, of
Bank to extend any further credit under any of the Loan Documents shall
immediately cease and terminate; and (c) Bank shall have all rights, powers and
remedies available under each of the Loan Documents, or accorded by law,
including without limitation the right to resort to any or all security for any
of the Credits and to exercise any or all of the rights of a beneficiary or
secured party pursuant to applicable law. All rights, powers and remedies of
Bank may be exercised at any time by Bank and from time to time after the
occurrence of an Event of Default, are cumulative and not exclusive, and shall
be in addition to any other rights, powers or remedies provided by law or
equity.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by Bank of any breach of
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or default under any of the Loan Documents must be in writing and shall be
effective only to the extent set forth in such writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any party
is required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:
BORROWER: Peregrine Systems, Inc.
12670 High Bluff Drive
San Diego, CA 92130
Attention: Chief Financial Officer
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
401 B street, Suite 2201
San Diego, CA 92101
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended or
incurred by Bank in connection with (a) the negotiation and preparation of this
Agreement and the other Loan Documents not to exceed a maximum of $2000.00,
Bank's continued administration hereof and thereof, and the preparation of any
amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights
and/or the collection of any amounts which become due to Bank under any of the
Loan Documents, and (c) the prosecution or defense of any action in any way
related to any of the Loan Documents, including without limitation, any action
for declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing incurred
in connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however, that
Borrower may not assign or transfer its interest hereunder without Bank's prior
written consent. Bank reserves the right to sell, assign, transfer,
<PAGE>
negotiate or grant participations in all or any part of, or any interest in,
Bank's rights and benefits under each of the Loan Documents. In connection
therewith, Bank may disclose all documents and information which Bank now has or
may hereafter acquire relating to any of the Credits, Borrower or its business,
or any collateral required hereunder.
SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
Loan Documents constitute the entire agreement between Borrower and Bank with
respect to the Credits and supersede all prior negotiations, communications,
discussions and correspondence concerning the subject matter hereof. This
Agreement may be amended or modified only in writing signed by each party
hereto. In the event of a conflict between the terms of this Agreement and any
other Loan Document, the terms of this Agreement shall prevail.
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.
SECTION 7.7. TIME. Time is of the essence of each and every provision of
this Agreement and each other of the Loan Documents.
SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when executed and delivered shall be deemed to be
an original, and all of which when taken together shall constitute one and the
same Agreement.
SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
SECTION 7.11. ARBITRATION.
(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
<PAGE>
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel arbitration of a Dispute. Any party who
fails or refuses to submit to arbitration following a lawful demand by any other
party shall bear all costs and expenses incurred by such other party in
compelling arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered by the
American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in California
selected by the AAA or other administrator. If there is any inconsistency
between the terms hereof and any such rules, the terms and procedures set forth
herein shall control. All statutes of limitation applicable to any Dispute
shall apply to any arbitration proceeding. All discovery activities shall be
expressly limited to matters directly relevant to the Dispute being arbitrated.
Judgment upon any award rendered in an arbitration may be entered in any court
having jurisdiction; provided however, that nothing contained herein shall be
deemed to be a waiver by any party that is a bank of the protections afforded to
it under 12 U.S.C. Section 91 or any similar applicable state law.
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all
<PAGE>
Disputes in accordance with the substantive law of the state of California, (ii)
may grant any remedy or relief that a court of the state of California could
order or grant within the scope hereof and such ancillary relief as is necessary
to make effective any award, and (iii) shall have the power to award recovery of
all costs and fees, to impose sanctions and to take such other actions as they
deem necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary, in
any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
California, and (iii) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (A) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (B) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is supported by substantial evidence and
not based on legal error under the substantive law of the state of California.
(f) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration if
the Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
<PAGE>
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.
(g) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
WELLS FARGO BANK,
PEREGRINE SYSTEMS, INC. NATIONAL ASSOCIATION
By: /s/ Alan H. Hunt By: /s/ Christopher L. Snider
----------------------- -------------------------
Alan H. Hunt Christopher L. Snider
President/ Relationship Manager
Chief Executive Officer
<PAGE>
(Translated from French)
SPECIAL LIMITED LEASE
THE UNDERSIGNED PARTIES:
The company known as CENTRALE MONCEAU, a non-trading company with a capital of
421,052,700 francs, recorded in the Commercial and Corporate Register of PARIS
as No. D 309.361.467, whose headquarters are located at 65 Rue Monceau, 75008
Paris, represented by Mr. SUBRA,
hereinafter referred to as the "LESSOR",
PARTY OF THE FIRST PART,
AND:
the company known as APSYLOG, a limited-liability company with a capital of
2,909,100 francs, recorded in the Commercial and Corporate Register of PARIS as
No. B 340 816 164, whose headquarters are located at the Tour Franklin [Franklin
Tower], Defense 8, 92042 PARIS LA DEFENSE, represented by its chairman and chief
executive officer, Mr. Gilles QUERU,
hereinafter referred to as the "LESSEE",
PARTY OF THE SECOND PART,
<PAGE>
2
HAVE REACHED AND ENTERED INTO THE AGREEMENT SET FORTH IN THE FOLLOWING ARTICLES:
Article I - PURPOSE:
The Lessor hereby conveys, through a special limited lease, to the Lessee, who
accepts, the premises designated hereinbelow, located at:
TOUR FRANKLIN
QUARTIER BOIELDIEU
92800 PUTEAUX
Article II - DESCRIPTION OF THE LEASED PREMISES:
- - ON THE 24TH FLOOR, AN OFFICE AREA CONSISTING OF APPROXIMATELY 136 SQUARE
METERS, INCLUDING A PORTION OF THE COMMON AREAS, ALONG WITH 3 ASSIGNED PRIVATE
PARKING SPACES,
in as-is condition, with no exceptions or reservations, and without need to
provide a more detailed description, at the express request of the Lessee, who
declares that it is thoroughly familiar with the said premises as a result of
having viewed them, visited them, and found them in the condition necessary for
their intended use and in compliance with all of the standards and/or
regulations applicable to premises of this type.
Article III - INDIVISIBILITY OF THE LEASED PREMISES
The parties hereby agree that the leased premises shall form an indivisible
whole.
Article IV - DURATION:
The present lease shall be granted for a period of 23 MONTHS, starting on
NOVEMBER 1, 1995 and ending on SEPTEMBER 30, 1997.
THE LEASE MAY BE TERMINATED AT ANY TIME DURING THE SAID PERIOD, BY EITHER OF THE
PARTIES, PROVIDED THAT NOTICE IS FORWARDED TO THE OTHER PARTY VIA REGISTERED
LETTER ONE MONTH IN ADVANCE.
<PAGE>
3
Because the present lease has been entered into for a period of less than two
years, it shall be exempt from the provisions of Decree No. 53-960 of September
30, 1953 or subsequent decrees.
Article V - PURPOSE OF THE LEASED PREMISES:
The leased premises shall not be used for any purpose other than as OFFICES at
any time during the above-mentioned term of the lease.
The Lessee shall be required to preserve the present contractual purpose of the
leased premises, to the exclusion of all other uses of any kind, extent, or
duration, under penalty of termination of the present lease, at the discretion
of the Lessor.
The Lessor expressly reserves the right to lease any and all other premises
within the building as it pleases and to whom it pleases, for all purposes
without exception or reservation, including for all activities that are
identical to the activities stipulated hereinabove.
Article VI - GENERAL TERMS AND CONDITIONS:
The present lease shall be granted under standard common and legal terms and
conditions, and also under the terms and conditions set forth hereinbelow, with
which the LESSOR shall undertake to comply:
1) OCCUPANCY, SUB-LEASING, AND TRANSFERS:
a) OCCUPANCY:
The Lessee shall personally occupy the leased premises, and shall not allow any
other party to hold or possess the premises in any way, even temporarily, free
of charge, and/or precariously.
b) SUBLEASING:
Any and all subleasing, in whole or in part, shall be prohibited.
c) TRANSFERS:
The Lessee may transfer its lease to the purchaser of its assets or of its
business.
Any and all other transfers shall be prohibited.
<PAGE>
4
In all instances the Lessee shall remain a guarantor, jointly and united with
the transferee and subsequent transferees, with no authority to raise any legal
objection to its joint and united surety, either with regard to payment of the
rent or with regard to compliance with the terms and conditions of the lease.
The transfer shall be implemented through a notarized document executed with the
participation of the Lessor's attorney. The Lessor must be invited, by means of
a registered letter with return receipt requested, to participate in this act,
and an enforceable copy of the said document shall be delivered to the Lessor,
at no expense to the him.
2) OBLIGATION TO OPERATE AND GUARANTEE THE LEASE PAYMENTS:
The Lessee shall keep the leased premises continuously in use and equipped at
all times with materials, merchandise, equipment, tools, and furnishings in
sufficient quantity and of sufficient value to enable payment of the rent and
compliance with all of the terms and conditions of the lease.
3) INSURANCE:
a) The property manager shall provide insurance for the entire building,
at its reconstruction value, against the risks of fire, explosion,
freezing, storms, water damage, hurricanes, and falling aerial
navigation equipment, through a company that is known to be solvent,
and will maintain the insurance throughout the entire term of the
lease.
b) The Lessee shall, at its own expense, obtain and maintain, throughout
the entire term of the lease, insurance on its furnishings, equipment
(whether owned by it or entrusted to it), fittings, and installations,
against the risks of fire, explosion, water damage, and claims by
neighboring tenants and third parties. The Lessee shall also insure
itself against the breaking of glass and windows in the offices
occupied by the Lessee.
C) The Lessee shall also obtain, at its own expense, in its capacity as
an occupying tenant and for the maximum amounts allowed by the
insurance companies, civil liability insurance, for all personal
injuries or property damage that may be caused to third parties as a
result of occupancy of the premises, by employees of the Lessee, due
to installations or set-up activities, or through the presence and/or
use of the facilities or fixtures for which the Lessee is responsible.
If such work is directed
<PAGE>
5
by an architect, interior designer, or interior decorator, the said
director of the work shall at all times provide proof that he or she
has professional civil-liability insurance and is current in his or
her payments of the corresponding premiums.
d) The insurance policies of the Lessee shall also arrange that
cancellation shall not become effective until fifteen (15) days after
notification has been forwarded by the insurer to the Lessor. The
said policies must include a waiver of claims against the Lessor and
its insurer.
e) The Lessee shall provide to the Lessor, in response to the first
request made by the latter, all documented evidence regarding the
signing of the policies mentioned hereinabove and payment of the
corresponding premiums. The Lessee hereby and henceforth waives any
and all right to claims against the Lessor and its insurer. The
Lessee shall immediately notify the Lessor of any and all disasters,
even if no apparent damage has occurred.
It shall be expressly agreed that any and all indemnifications payable
to the Lessee by any insurance company, in the event of a disaster, for any
reason whatsoever, shall be allocated to the Lessor's preferential claim,
with the present contract serving, if necessary, as a carry-over for any
amounts that may be due.
f) The Lessor shall personally handle the insurance for the building.
The insurance policy for the building shall include a waiver of claims
against the Lessee and its insurers.
4) DELIVERY OF THE PREMISES:
The premises shall be transferred in as-is condition, with the proviso that a
site report for the premises shall be prepared before the lease becomes
effective.
Unless otherwise indicated, the Lessee shall be deemed to have accepted the
premises in excellent condition.
<PAGE>
6
5) MAINTENANCE OF THE PREMISES:
The Lessee shall comply with the provisions of the internal regulations
currently in effect, and/or the provisions of the co-ownership regulations. The
Lessor company shall reserve the right to make any changes in the said
regulations for the sake of an improvement in general well-being.
The Lessee shall use the leased premises with care, maintaining them and
returning them at the end of the lease in good condition in terms of minor
repairs incumbent upon the tenant and all types of maintenance.
The Lessee shall maintain and replace, as needed, as its entire responsibility,
all of the facilities and fixtures intended for its personal use.
The posting of signs shall be prohibited.
The Lessee shall be solely responsible for paying the expenses associated with
all work that it deems useful or necessary in connection with its business
activity, along with all repairs and all work of any kind that may be required
by the regulations that are currently effective or that may become effective in
the future, particularly with regard to health, safety, and working conditions.
Any installation or storage of objects whose weight would exceed the weight
limit of the floors shall be prohibited.
The Lessee shall immediately inform the Lessor, with subsequent written
confirmation, of any and all repairs that may be incumbent upon the Lessor to
perform, subject to the penalty of being held responsible for any and all
deterioration or damage resulting from the silence or delay of the Lessee.
At all times the Lessee shall allow free access to the leased premises by the
Lessor, its agents, and its architect, so that they may assure themselves of the
proper state of maintenance of the premises.
The Lessee hereby expressly waives recourse to the provisions of Article 1724 of
the Civil Code.
The Lessee shall allow any and all repairs, reconstruction work, vertical
additions, and other work of any kind that is carried out on the leased premises
or in the building. The Lessee shall not seek any indemnification or reduction
in the rent, regardless of the extent and/or duration of the aforementioned
work.
The Lessee shall remove, at its own expense and without delay, any and all
fixtures, fittings,
<PAGE>
7
and/or furnishings whose removal is necessary in order for the repairs described
in Article 606 of the Civil Code to be performed.
6) WORK:
The Lessee shall not engage in any demolition or construction work on the leased
premises, or, generally speaking, any work involving the frame or walls of the
premises, without having obtained the necessary civil and administrative
permits, or without having obtained written permission from the Lessor and, if
applicable, from the co-ownership property manager, who may place the work under
the control of his architect. The work in question shall be performed in
compliance with the regulations governing high-rise buildings, and in accordance
with the contents of the attached specifications. The fees charged by any and
all intervening parties shall be paid by the Lessee.
Any plans for fixtures, installations, improvements, and/or beautification work
contemplated by the Lessee shall be submitted to the Lessor for approval before
any work is done.
Any and all fixtures, installations, improvements, and/or beautification work
performed by the Lessee shall, through ownership and with no indemnification,
become the property of the Lessor at the end of the lease or at the end of any
subsequent renewal thereof.
Because the leased premises have been installed and arranged to suit the Lessee,
at the end of the lease the Lessor may require that the premises be returned to
their original condition at the expense of the Lessee, even if the work was
authorized by the Lessor.
7) BUSINESS ACTIVITIES:
The Lessee shall personally handle, without recourse to the Lessor and without
disturbing the Lessor, the acquisition of all of the authorizations and/or
permits, as mentioned in legislative, regulatory, civil, and/or other
provisions, that may be necessary in order for the Lessee to engage in its
business activities or in connection with its occupancy of the leased premises.
The Lessee shall also undertake to handle personally and at its own expense, any
and all changes that may need to be made to the leased premises and to the
fixtures thereon, as mandated by the legislation that is currently effective or
that may become effective in the future, particularly with regard to health,
safety, and working conditions.
<PAGE>
8
8) PARKING SPACES:
The Lessee shall take all necessary steps to ensure that use of any parking
spaces that it may lease is strictly reserved to members of its staff and to its
authorized visitors. The Lessee shall comply with the specific provisions
relating to parking spaces, as contained in the internal regulations for the
building and/or in the co-ownership regulations.
Only one key, card, or transmitter that provides access to the parking area
shall be issued for each space, and the said key, card, or transmitter must be
returned to the Lessor when the Lessee leaves.
In the event of loss or theft, the Lessee shall immediately forward written
notice thereof to the Lessor, who shall proceed with the replacement of the key,
card, or transmitter upon receipt of reimbursement, which shall be mandatory by
the Lessee.
9) VISITS TO THE PREMISES:
During the six-month period preceding the end of the lease, the Lessee shall
allow visits to the premises on all business days, from 9:00 a.m. until 11:00
a.m. and from 2:00 p.m. until 5:00 p.m., by all individuals authorized by the
Lessor.
During the same period, the Lessee shall allow the Lessor to post a notice or
sign indicating that the premises are available for lease.
10) VERMIN:
The Lessee shall destroy all insects, rodents, and other vermin, at its own
expense, as soon as they appear.
11) LIABILITY AND RECOURSE:
The Lessee shall not be entitled to seek any reduction in the rent, or to have
any recourse against the Lessor,
- in the event of any interruption or malfunction of the various
building services;
- in the event of theft, looting, destruction, or of other criminal acts
committed on the
<PAGE>
9
leased premises, including the parking areas. Notably, the Lessor
shall not be obligated to provide surveillance of any kind;
- in the event of damage caused to the leased premises and/or to objects
or merchandise located thereon, as a result of leaks, infiltrations,
humidity, or other conditions. The Lessee shall insure itself against
these risks, with no right to recourse against the Lessor.
12) GOOD MANAGEMENT AND NEIGHBORLINESS:
The Lessee shall maintain the attractive appearance of the leased premises.
The Lessee shall comply with all steps prescribed by the Lessor for good
management and for the general tranquillity of the establishment upon which the
present lease is contingent.
The Lessee shall, at its own risks, hazards, and expense, without disturbing or
seeking out the Lessor, personally handle all claims by neighboring occupants or
third parties, particularly regarding noise, odors, fumes, heat, or vibrations,
and other annoyances caused by its activities.
The Lessee shall be bound by the decisions of the Authorized Property Management
Association, as created by the Public Planning Council for the La Defense Region
and the public authorities, of which the Lessor is a member, with regard to the
management and maintenance of public-works projects of general interest to Zone
A in La Defense.
The Lessee shall be bound by all of the provisions that have been implemented,
or that may be implemented in the future, with regard to safety. It shall be
stipulated here that the Lessee shall henceforth undertake the task of creating,
by stages, a local safety group whose members shall be selected from among the
Lessee's permanent employees, and which shall consist of a section leader and
agents, who shall be proportional in number to the size of the Lessee's work
force. The number of agents shall be equal to at least one twenty-fifth (1/25)
of the occupants of the section, with a minimum of five individuals.
13) THE INTER-COMPANY RESTAURANT:
The Lessee who holds possession of the inter-company restaurant located in the
Tower shall undertake, upon arrival on the premises, to join and remain a member
of all authorized present or future entities, such as associations, economic
interest groups, or other types of organizations encompassing all of the users
of the inter-company restaurant.
<PAGE>
10
The Lessee shall reimburse the Lessor or its agent for its participation in the
amortization and/or depreciation expenses associated with the investments,
operational and maintenance expenses, repairs, and renovations, along with all
costs, charges, and other expenses associated with the premises, equipment,
installations, and miscellaneous materials that constitute the inter-company
restaurant and the associated adjoining premises.
The present provisions shall constitute an essential and determining article of
the present lease.
14) UTILITIES:
The Lessee shall handle all charges for water service, electricity, etc.
15) TAXES:
The Lessee shall pay all expenses associated with city, police, and road
maintenance services that lessees are customarily required to pay, so that the
Lessor shall not be disturbed with regard to this subject. Specifically, the
Lessee shall pay the personal and property taxes, lease taxes, professional tax,
and all other taxes of any kind for which the Lessor is responsible, including
the land-use tax and the annual tax on office premises located in the
Ile-de-France region, as created by Article 40 of the Amending Finance Act for
1989, and shall provide proof of payment of the said taxes upon request, and in
any event no later than one week prior to the Lessee's departure from the leased
premises.
Generally speaking, the Lessee shall remit exact payment of all contributions
and/or taxes that are currently in existence or that may be created in the
future.
Article VII - RENT:
The present lease shall be agreed to and accepted in consideration of an annual
basic rent in the amount of:
149,600 FRANCS
(ONE HUNDRED FORTY-NINE THOUSAND, SIX HUNDRED FRANCS)
exclusive of taxes, payable quarterly and in advance, on the first day of the
month in each calendar quarter.
<PAGE>
11
The rent shall be due starting on NOVEMBER 1, 1995.
The parties hereby agree that the agreed-upon lease shall be subject to
Value-Added Tax (VAT).
The said tax shall be paid by the Lessee, who shall also undertake to pay any
and all taxes that may be enacted legislatively as replacements for the VAT.
In the event of non-payment of the VAT or of the corresponding charges upon
expiration of the lease, the Lessee shall be liable to the Lessor for penalty
delay interest payments, calculated on a daily basis and payable with the
principal amount, with the understanding that the arrival of the due date shall
constitute notice that payment is due.
The said interest shall be payable as of the due date, and shall be calculated
on the basis of the annual rate for advances on securities as set by the BANK OF
FRANCE, plus five points.
Article VIII - INDEXING OF THE LEASE FEE:
The rent shall be indexed to the national construction cost index published
quarterly by the I.N.S.E.E. [the French National Institute of Statistics and
Economic Surveys].
Therefore, the rent shall be adjusted automatically every year, on the
anniversary date of the beginning of the lease, in the same direction and in the
same proportion as the change in the said index in comparison with the previous
year.
The reference index upon the effective date of the lease shall be the index for
the SECOND QUARTER OF 1995, I.E., 1023. Thus, the variation in this index for
this same quarter, from one year to the next, shall be used to calculate the
indexing of the rent.
In the event of a delay in publication of the index, the rent may be calculated
provisionally in accordance with the most recent published index.
Because the change in the rent is automatic, it shall not be subject to any
notification. The fact that the change may not have been calculated immediately
shall not entail any forfeiture of the right of either of the parties to seek
the subsequent retroactive application of the change.
If the I.N.S.E.E. index should cease to be published, it shall be replaced, in
the absence of any official replacement index, by an equivalent index selected
either by amicable agreement by and between the parties, or, without the
agreement of the parties, through an expert evaluation made by a single expert,
who shall be appointed either by mutual agreement of the parties, or pursuant
<PAGE>
12
to a ruling by the President of the Superior Court, issued in response to a
request submitted by the more diligent party, with the expenses associated with
the expert evaluation, and the court costs, being paid solely by the Lessee.
The expert shall act as the common agent of the parties, in accordance with the
provisions of Article 1592 of the Civil Code, whose provisions have been
extended to apply to leasing contracts.
If the Lessor company should fail to apply the provisions of the present
indexing article, in spite of a change in the reference index, under no
circumstances shall such an act be construed as an implicit waiver of indexing
of the rent.
The present indexing article shall constitute an essential and determining
article, without which the Lessor shall not be deemed to have entered into a
contract. Therefore, the partial or total non-application of the present
article may entitle the Lessor, and the Lessor alone, to demand cancellation of
the lease with no indemnification.
Article IX - CHARGES:
Because the rent is deemed to be net of charges for the Lessor, the Lessee shall
bear the cost of all charges, allowances, provisions, taxes, and expenses
relating to the leased premises, including the property management fees and the
owner's insurance premiums.
Once each quarter, at the same time as the rent, the Lessee shall remit a sum to
cover charges, which shall be equal to one-quarter of the projected annual
budget of payments to be made by the Lessee.
At the end of each calendar year, the discount for the charges incumbent upon
the Lessee shall be agreed upon, and, as applicable, the Lessee shall be
reimbursed for any overpayment or shall remit payment of an additional sum.
The provisions set forth hereinabove may be amended accordingly.
They shall be adjusted so as to always correspond to one-quarter (1/4) of the
projected budget, as soon as the said figures are known.
However, if the Lessor is required to pay any amounts on behalf of the Lessee,
the Lessee shall be required to reimburse the Lessor without delay.
<PAGE>
13
Article X. - SECURITY DEPOSIT:
To guarantee compliance with its obligations, the Lessee shall pay to the
Lessor, on the day the present document is signed, the sum of:
37,400 FRANCS
(THIRTY-SEVEN THOUSAND, FOUR HUNDRED FRANCS)
which corresponds to the rent for a three-month period.
The said sum shall not earn interest for the Lessee, and shall not be applicable
to the last installment of the rent.
Upon termination of the lease, the said sum shall be applied to the
indemnifications that the Lessee may owe to the Lessor.
If the present lease agreement is terminated due to non-compliance with its
terms and conditions for any reason attributable to the Lessee, the security
deposit shall remain the property of the Lessor, without prejudice to any
damages that may be awarded to the Lessor.
If the rent is modified, the security deposit shall be reduced or increased in a
wholly lawful manner and with no formalities, so that it always corresponds to
the rent for a three-month period.
Article XI. - TERMINATION:
It shall be expressly agreed that in the event of non-payment of a single
installment of rent or of the corresponding VAT, when due, or in the event of
non-compliance with any one of the other stipulations of the lease agreement,
the said agreement shall be terminated in a wholly lawful manner, if the Lessor
so pleases, without any need for formal legal proceedings, one month after a
demand for payment or a simple notice to comply has not elicited payment or
compliance.
The Lessor shall regain full control of the premises through the simple act of
evicting the Lessee, as implemented through a court order. No subsequent
proposals or propositions shall halt or prevent the application of the present
article or influence the right of the Lessor to receive payment of past and/or
future rent, up until the end of the three-year period in effect, or influence
the right of the Lessor to be compensated for the costs of repairs for which the
Lessee is responsible. All other dues, rights, or actions shall also be
reserved.
<PAGE>
14
Article XII. - MISCELLANEOUS EXPENSES:
The Lessee shall pay all of the expenses, duties, and fees associated with the
present lease and any expenses, duties, and fees that may arise as a result of
the present lease.
Article XIII. - ELECTION OF DOMICILE AND JURISDICTION:
For the purposes of the present document, the Lessor elects its headquarters as
its domicile, and the Lessee elects the leased premises as its domicile.
The parties hereby agree that any and all disputes that may arise in connection
with the present document shall be resolved solely through the courts within
whose jurisdiction the headquarters of the Lessor are located.
Made in three copies, in Paris, on [handwritten] November 1, 1995.
FOR THE LESSOR FOR THE LESSEE
[handwritten] [handwritten]
Read and approved. Read and approved.
[signature] [signature]
<PAGE>
15
ATTACHMENT 1
"SET-UP SPECIFICATIONS"
PREAMBLE
The set-up activities for the premises or offices located on the floors of
high-rise buildings must comply with the regulatory provisions defined in Title
II of the Construction and Residential Code, entitled "Safety and Fire
Protection."
Accordingly, the following general conditions must be observed:
<PAGE>
16
SET-UP:
The set-up shall be performed in such a way that evacuations of personnel are
implemented wisely, using the common passageways and traffic paths in the
building.
The plans shall be submitted for approval by the co-ownership property manager
of the building, and the work shall not be performed until the said written
approval has been obtained.
CONSTRUCTION MATERIALS:
Two criteria shall be met:
a) FIRE RESISTANCE, for containment in relation to the common passageways,
traffic paths, and specific areas that are candidates for isolation;
b) FIRE PROOFING, for decorative and sound-related coatings and coverings,
etc.
The property management service has specialists whom tenants may consult.
ELECTRICITY:
Proprietary installations and equipment shall comply with the standards
currently in effect, and in any event shall not interfere with the common
circuits in the building.
VENTILATION:
If, for reasons pertaining to operation, it is found that some areas require
specific ventilation, under no circumstances shall the common conduits or ducts
for the building be used for this purpose.
No operations shall be performed on the air-conditioning and air-purification
systems without the consent of the building's technical and safety departments.
<PAGE>
17
WATER:
MUNICIPAL WATER: If, in order to meet individual needs, it appears necessary
to provide more water taps in addition to the existing common installations, an
official request shall be submitted to the co-ownership Technical Department.
WASTE-WATER: The same provisions set forth for municipal water shall be
observed.
ANNOYANCES CAUSED BY SET-UP ACTIVITIES:
ODORS, DUST, AND NOISE: Specific instructions shall be provided, on a
case-by-case basis, for the distribution of schedules, particularly when
noise-producing work is involved.
ASSOCIATED BUSINESSES AND/OR TRADES:
All businesses and/or trades contracted by the tenant shall be introduced by the
tenant to the property manager or to the property manager's agent, so that the
nature and duration of the work may be known, if the work will have an effect on
the common areas of the building.
The number of personnel from outside the building who will be present on the
site shall be disclosed. Safety and operating signs shall be set up for each of
the contracted businesses and/or trades.
CONDITION OF THE PREMISES:
When the occupant leaves, the property manager's department shall be charged
specifically with monitoring the proper performance of disassembly and removal
work, and particularly the work relating to the various fixtures and facilities
described in the foregoing articles.
<PAGE>
LEASE
THE UNDERSIGNED PARTIES:
The company known as CENTRALE MONCEAU, a non-trading company with a capital
of 421,052,700 francs, recorded in the Commercial and Corporate Register of
Paris at No. D 309.361.467, whose headquarters are located at 65 Rue Monceau,
75008 PARIS, represented [by] GFF GESTION Societe Anonyme, a limited-liability
company with capital of 62,930,000 francs, recorded in the Commercial and
Corporate Register of NANTERRE as No. B 379 010 291, whose headquarters are
located at the Tour Franklin - 100/101 Quartier Boieldieu, 92800 PUTEAUX,
itself represented by Miss Vignes,
hereinafter referred to as the "LESSOR",
PARTY OF THE FIRST PART,
AND:
the company known as APSYLOG, a limited-liability company with capital of
2,000,000 francs, recorded in the Commercial and Corporate Register of Paris
at No. B 340 816 164, whose headquarters are located at 10 Rue Vauvilliers in
Paris 75039 Cedex 01, represented by its chairman and chief executive
officer, Mr. Gilles Queru,
hereinafter referred to as the "LESSEE",
PARTY OF THE SECOND PART,
<PAGE>
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HAVE REACHED AND ENTERED INTO THE AGREEMENT SET FORTH IN THE FOLLOWING ARTICLES:
The parties expressly agree that for their common purposes, the leased premises
shall form an indivisible whole.
The Lessor hereby leases to the Lessee, who accepts, the premises designated
hereinbelow.
ARTICLE 1 - DESCRIPTION:
BUILDING:
TOUR FRANKLIN
100/101 QUARTIER BOIELDIEU
92800 PUTEAUX
LEASED PREMISES:
- - ON THE 24TH FLOOR, AN OFFICE AREA CONSISTING OF APPROXIMATELY 838.40 SQUARE
METERS, INCLUDING A PORTION OF THE COMMON AREAS MEASURING 94 SQUARE METERS,
ALONG WITH A FILING SPACE OF APPROXIMATELY 31 SQUARE METERS, IN ACCORDANCE
WITH THE DATAQUEST DIAGRAM OF THE PREMISES, AS ATTACHED HERETO,
UNFURNISHED.
- - UNDERGROUND AND OUTSIDE THE AREA CONTROLLED BY THE TOUR, THE LEASE OF THE
ABOVE-MENTIONED PREMISES ALSO ENTITLES THE LESSEE TO 4 NON-ASSIGNED PARKING
SPACES,
in as-is condition, with no exceptions or reservations, and with no need to
provide a more detailed description, inasmuch as the Lessee, who declares that
it is thoroughly familiar with the said premises.
It shall be specified that any errors in the foregoing description shall not
justify any reduction or inrease in the lease fee, inasmuch as the Lessee
acknowledges having received all of the information relating to the nature and
condition of the premises.
Therefore, the Lessee waives in advance any and all discussions, disputes, or
claims regarding the location and surface area of the building, the nature of
the work, and the quality or specifications of the construction.
ARTICLE 2 - DURATION:
<PAGE>
-3-
The present lease is hereby granted and accepted for a period of nine (9) full
and consecutive years, starting on MARCH 15, 1995 and ending on MARCH 14, 2004.
The lease may be terminated every three years, at the sole initiative of the
Lessee, provided that non-judicial notice is forwarded to the Lessor six months
prior to expiration of the lease.
By express agreement of the parties, the Lessee waives the option of giving
notice upon expiration of the first three-year period, i.e., on MARCH 14, 1998.
ARTICLE 3 - USE:
The leased premises shall be used for business offices. The Lessee may use the
premises to engage in its business activity, i.e.:
- - The provision of data-processing services and advice (NAF Code No. 7222)
The above-mentioned purpose shall be stipulated to the exclusion of any and all
other purposes, and the Lessee shall not be authorized to change this
attribution through the substitution or addition of activities.
ARTICLE 4 - CHARGES, TERMS, AND CONDITIONS:
The present lease shall be granted pursuant to the following charges, terms, and
conditions, with which the Lessor shall undertake to comply:
4.1 The Lessee shall take possession of the leased premises in the
condition in which the premises are found on the day on which the
lease becomes effective. At no time and under no pretext whatsoever
shall the Lessee be entitled to require any work of any kind
whatsoever. A site report, containing observations by both parties,
shall be prepared before any work performed by the Lessee is begun,
and in any event before the lease becomes effective.
4.2 The Lessee shall furnish the leased premises and keep them furnished,
with furniture, movable objects, and merchandise in sufficient
quantity and of sufficient value to enable payment of the rent and
compliance with all of the terms and conditions of the lease, and to
allow the Lessee to engage in its business activity in a continuous
manner.
4.3 In order for the leased premises to remain in good condition, free
from all degradation or
<PAGE>
-4-
deterioration of any kind, the Lessee shall, during the course of the
lease and at its own expense, perform all repairs and all maintenance
work of all kinds that may be necessary, including work involving the
closing of various areas, carpets, tiles, locks, plumbing, woodwork,
sanitation facilities, etc. The foregoing list is purely illustrative
and in no way limitative. Major repairs, as described and defined in
Article 606 of the Civil Code, shall be performed at the Lessor's
expense.
4.4 The Lessee shall use the leased premises with care, and shall return
them at the end of the lease in good condition in terms of all minor
local repairs.
4.5 The Lessee shall personally handle, in a timely manner, the matter of
obtaining all civil, administrative, and/or other authorizations or
permits that may be required for use of the premises and/or in order
to engage in its business activity, so that the Lessor shall not be
disturbed by, or concerned with, this subject.
4.6 The Lessee shall not cut through any walls, or make any changes in
their arrangement, without the express written consent of the Lessor.
If consent is granted, the work shall be carried out under the
supervision of the Lessor's architect, at the expense of the Lessee,
under control by the building's property manager and in compliance
with the regulations governing high-rise buildings.
4.7 Any work, beautification, improvements, and/or installations executed
by the Lessee shall remain the property of the Lessor, with no
indemnification by the Lessor, unless the Lessor opts to require that
the premises be restored to their original condition, at the Lessee's
expense.
4.8 The Lessee shall allow any and all repairs, regardless of their
duration (up to or exceeding 40 days) that are performed within the
building, in the courtyard, on the public road, or on the neighboring
buildings, regardless of the inconvenience caused to the Lessee by
such work. In such a case, the Lessee shall have no recourse against
the Lessor, and shall not be entitled to seek any indemnification or
reduction in the rent, even if the building services should be
interrupted for any reason whatsoever.
4.9 In pursuing its business activity and in its use of the leased
premises, the Lessee shall comply, in such a way that the Lessor is
never inconvenienced or disturbed, with the laws, regulations,
administrative and/or civil provisions, safety and health rules, rules
of the road, police regulations, rules relating to dealings with the
public, and/or any other rules or regulations, and with the contents
of the specifications attached hereto, as well as the regulations
issued by the Property Owners' and Managers' Association in the zone,
and with the provisions of the Co-ownership Regulations.
<PAGE>
-5-
The Lessee shall also pay all of the charges, expenses, taxes, and
various other items for which it or the Lessor may be responsible in
connection with the above-mentioned regulations and/or legal
provisions.
4.10 Under no circumstances, and in no way, shall the Lessor be responsible
for any thefts, embezzlement, or difficulties with neighboring
leaseholders to which the Lessee may fall victim within the leased
premises. The Lessee shall personally make arrangements, in the
manner that it deems appropriate, for the safety and monitoring of the
premises.
The Lessee shall be the sole party responsible or liable for any and
all difficulties with neighboring leaseholders caused by the Lessee,
such that the Lessor shall never be disturbed or inconvenienced in
this regard.
4.11 The Lessor shall remit accurate payments for personal property
contributions, professional and other taxes, all lease-related taxes
(including, in particular, the taxes that ensure the provision of
services such as streetsweeping, lighting, police services, and road
work) for which leaseholders are customarily charged, and shall
reimburse the Lessor for the land-use tax and the annual tax on office
premises located in the Ile-de-France region, as created by Article 40
of the Amending Finance Act for 1989. Generally speaking, the Lessee
shall remit exact payment of all contributions and/or taxes that are
currently in existence or that may be created in the future.
4.12 The Lessee shall allow free access to the leased premises by the
Lessor or its agent, its architect, and all contractors, and shall
allow all necessary work to be performed, with the understanding that
the Lessor shall notify the Lessee 48 hours in advance, and provided
that the visit shall take place on a business day.
4.13 As soon as notice has been given, or even in the event that the leased
premises are sold, the Lessee shall allow visits on business days and
during business hours, and shall allow an advertising placard to be
placed in the windows. The Lessee shall also give the Lessor advance
notice of its intent to vacate the premises, doing so at least one
month in advance, in order to allow the Lessor to submit the proper
legal declarations to the revenue authorities.
A report on the premises shall be prepared, with comments by both
parties, no later than the day on which the lease expires. Following
the preparation of the report, the Lessee shall return the keys to the
Lessor. The said report on the premises shall include a list of
repairs to be performed by the Lessee.
4.14 In the event of the legal reorganization or liquidation of the Lessee,
or in the event of the
<PAGE>
-6-
death of the Lessee (if the Lessee, as the result of an assignment or
transfer, were a natural person), the heirs, assigns, and/or agents of
the Lessee shall be jointly, severally, and indivisibly liable for
payment of the lease fees, charges, and related expenses in connection
with the execution of the present lease agreement, and without being
entitled to invoke the advantage of separability. The said heirs,
assigns, and/or agents shall also, and under the same conditions, pay
the costs of the notification mentioned in Article 877 of the Civil
Code.
4.15 Any leniency that the Lessor may display during the execution of the
present lease agreement, regardless of its duration, shall not entail
any change in, or elimination of, the present terms and conditions.
4.16 The Lessee shall honor and comply with the existing organization in
terms of the management of the building, whose management should be
organized in such a way that a single party is responsible for the
common services (e.g., elevators and vertical traffic, heating, waste
disposal, cleaning, social services, safety services, the use of
reserved parking spaces, arrangements involving catering trucks,
etc.).
4.17 The Lessee shall not engage in any commercial activity in the parking
areas.
4.18 The Lessee shall be bound by the decisions of the Authorized Property
Management Association, as created by the Public Planning Council for
the La Defense Region and by the public authorities, of which the
Lessor is a member, with regard to the management and maintenance of
projects of general interest to Zone A in La Defense.
4.19 The Lessee shall be bound by all of the provisions that have been
implemented, or that may be implemented in the future, with regard to
safety. It shall be stipulated here that the Lessee shall henceforth
undertake the task of creating, by stages, a local safety group whose
members shall be selected from among the Lessee's permanent employees,
and which shall consist of a section leader and agents, who shall be
proportional in number to the size of the Lessee's work force. The
number of agents shall be equal to at least one twenty-fifth (1/25) of
the occupants of the section, with a minimum of five individuals.
4.20 The Lessee hereby undertakes unreservedly to obtain, from the public
administrative authorities, the necessary approval to occupy the
premises. However, issuance of the said approvals shall not
constitute a suspensive condition for execution of the lease.
4.21 The inter-company restaurant
The Lessee who holds possession of the inter-company restaurant located on the
ground floor of the Tower shall undertake, upon arrival on the premises, to join
and remain a member of all
<PAGE>
-7-
authorized present or future entities, such as associations, economic-interest
groups, or other types of organizations encompassing all of the users of the
inter-company restaurant.
The Lessee shall reimburse the Lessor or its agent for its participation in the
amortization and/or depreciation expenses associated with the investments,
operational and maintenance expenses, repairs, and renovations, along with all
costs, charges, and other expenses associated with the premises, equipment,
installations, and miscellaneous materials that constitute the inter-company
restaurant and the associated adjoining premises.
The present provisions shall constitute an essential and determining article of
the present lease.
ARTICLE 5 - TRANSFERS:
The Lessee shall not transfer its rights to the present lease, in any way or for
any purpose whatsoever, without the prior express written permission of the
Lessor, unless the transfer is being made to the purchaser of the Lessee's
assets or business, in which case the Lessee shall remain a guarantor, jointly
and united with its transferee or with the beneficiary of the change.
No transfer shall take place if the Lessee is not completely current in its
payment of the rent and related remittances that may be due.
The transfer shall be documented in a private or certified instrument, in which
the Lessor shall be invited to participate, through notice forwarded via a
registered letter with return receipt requested, at least 5 days in advance.
The transfer document must contain the Lessee's guarantee obligation.
The transfer shall be communicated to the Lessor in accordance with the
provisions of Article 1690 of the Civil Code.
ARTICLE 6 - SUBLEASING:
Any subleasing, even temporary or partial subleasing, or the simple occupation
of the premises by a third party in any way (free of charge, for domiciliation,
etc.), if the sub-lessee is not a subsidiary or a company that belongs to the
same group as the Lessee, shall be subject to the express consent of the owner,
who shall reserve the right to accept or refuse the said sublease, at its
discretion.
Any violation of this rule may cause termination of the present lease contract,
simply upon
<PAGE>
-8-
detection of the violation.
In any event, the leased premises shall constitute an indivisible whole for the
common purposes of the parties.
ARTICLE 7 - RENT:
The present lease shall be agreed to and accepted in consideration of an annual
basic rent, exclusive of taxes, in the amount of 1,050,000 FRANCS (ONE MILLION,
FIFTY THOUSAND FRANCS), which the Lessee hereby undertakes to pay to the Lessor,
along with the related remittances, in the form of four (4) equal payments, made
in advance, on January 1, April 1, July 1, and October 1 of each year.
A rent exemption for seven (7) months shall be granted to the Lessee as of MARCH
15, 1995.
Thus, the first payment shall include the rent for the period from OCTOBER 15,
1995 to DECEMBER 31, 1995.
STARTING ON MARCH 15, 1999, THE RENT SHALL BE 1,110,000 FRANCS, NET OF TAX.
All payments shall be made at the Lessor's domicile, or at any other location
designated by the Lessor.
Any and all payments of rent, charges, or other costs that are not remitted by
the due date shall lawfully incur penalty interest charges, calculated on a
daily basis, and payable with the principal amount, with the understanding that
the arrival of the due date shall constitute notice that payment is due.
The said interest shall be payable as of the due date, and shall be calculated
on the basis of the annual rate for advances on securities as set by the BANK OF
FRANCE, plus five points.
ARTICLE 8 - CONTRACTUAL ADJUSTMENT OF THE RENT:
The rent shall be increased or reduced, with full legality, each year on the
anniversary of the effective date of the lease, with no legal or non-judicial
formalities, proportionally to the change in the quarterly construction cost
index published by the I.N.S.E.E. [the French National Institute of Statistics
and Economic Surveys].
The reference index shall be the index for the SECOND QUARTER OF 1994, I.E.,
1018.
<PAGE>
-9-
The comparison index used to calculate the new rent shall be the index for the
same calendar quarter as the reference index, with a shift of one year, and so
forth for each year.
If the index selected for the review and adjustment of the rent should cease to
be published, the said review and adjustment shall be made by taking either the
replacement index or a new index selected by mutual agreement of the parties.
If an agreement is not reached, the new index shall be selected by judicial
means.
The present provision article shall constitute an essential and determining
article, without which the lease shall not be deemed to have been authorized.
ARTICLE 9 - CHARGES:
The Lessee shall reimburse the Lessor for the portion of all of the charges,
contributions, insurance, taxes, and provisions established by the Co-ownership
Property Manager, particularly for maintenance of the common areas, operation of
the common installations, and administration of the co-ownership, pro-rated in
accordance with the number of thousandths of general or specific charges
allocated to the leased lots.
The said reimbursement shall be made by means of a quarterly provision, paid by
the Lessee in conjunction with each rent, in an amount set at 95,437.50 FRANCS.
The Lessor shall reserve the right to change the amount of the said provision in
order to deal with fluctuations in charges. At the end of each annual period,
the total amount of the provisions paid in shall be adjusted in accordance with
the report drawn up by the property manager.
The Lessee shall underwrite all maintenance contracts and utility charges, and
shall provide documented evidence thereof to the Lessor in response to the
initial request. The Lessee shall pay all contributions relating to the
premises and to the use thereof.
ARTICLE 10 - INSURANCE:
10.1 The property manager shall provide insurance for the entire building,
at its reconstruction value, against the risks of fire, explosion,
freezing, storms, water damage, hurricanes, and falling aerial
navigation equipment, through a company that is known to be solvent,
and shall maintain the insurance throughout the entire term of the
lease.
10.2 The Lessee shall obtain and maintain, throughout the entire term of
the lease, insurance
<PAGE>
-10-
on its equipment, furnishings, and fittings, and also on all movable
objects present on the leased premises, against the risks of theft,
fire, explosions, water damage, and claims by neighboring tenants and
third parties.
The Lessee shall remain liable for the risks inherent in its
operations, including all accidents and/or damage for which it shall
be liable, and shall obtain an insurance policy against these risks.
10.3 Waiver of reciprocal recourse:
The Lessee shall waive, and shall cause its insurers to waive, any and
all recourse against the Lessor for any material and/or immaterial
damages caused by fire, explosion, water damage, freezing, hurricanes,
and/or storms, for which the Lessor shall be held, and acknowledged to
be, responsible.
Reciprocally, the Lessor shall waive, and shall cause its insurers to
waive, any and all recourse against the Lessee for any material
and/or immaterial damages caused by fire, explosion, water damage,
freezing, hurricanes, and/or storms, for which the Lessee shall be
held, and acknowledged to be, responsible.
10.4 Furthermore, for instances in which the nature of the products stored
by the Lessee would entail payment of an additional insurance premium
for the Lessor, the Lessee shall be required to reimburse the Lessor
for the said additional premium.
Moreover, the Lessee hereby undertakes to advise the Lessor, by means
of a registered letter, and soon enough to allow the associated
insurance company to be contacted in a timely manner, of any and all
losses of which the Lessee is aware, that may affect the overall
maintenance of the building, even if no obvious damage is visible.
The Lessee may be subject to the penalty of being held personally
liable for any damage for which, because of the omission or delay of
the said declaration, a claim could not usefully be submitted to the
company insuring the building.
10.5 The Lessee hereby undertakes to exercise all direct recourse relating
to thefts or deterioration to which it, its employees, or its vehicles
may fall victim, with the Lessor declaring, pursuant to the provisions
of Article 1725 of the Civil Code, that it shall not take
responsibility for any difficulties that may be brought to its
attention by third parties, and declining all liability for any
accidents of any kind that may occur as a result.
ARTICLE 11 - TERMINATION:
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In the event of non-payment of a single rent payment or related charges exactly
when due, or in the event of non-compliance with any one of the other terms
and/or conditions of the present lease agreement, and one month after a simple
demand for payment or a summons containing a statement by the Lessor of its
intention to exercise the provisions of the present article that has remained
unanswered, the present agreement shall be terminated in a wholly lawful manner,
and the Lessee may be evicted pursuant to a simple court order issued in
connection with the demand for payment and/or the summons to perform that has
remained unanswered, without any need for formal legal proceedings, and in spite
of any and all other subsequent offers to pay or to perform.
In the event of the liquidation of assets or legal reorganization, the present
lease agreement shall be terminated with full legality, at the discretion of the
Lessor, through a simple statement by the Lessor of its intention to terminate
the said agreement.
ARTICLE 12 - SECURITY DEPOSIT:
For certainty and a guarantee of compliance with the obligations set forth in
the present lease agreement, when the agreement is signed, the Lessee shall pay
to the Lessor a security deposit in the amount of 262,500 FRANCS (TWO HUNDRED
SIXTY-TWO THOUSAND, FIVE HUNDRED FRANCS).
The said sum, which shall not earn interest, shall represent the rent for a
three-month period, exclusive of taxes.
It shall be returned to the Lessee after termination of the present lease, and
after payment of all sums that may be due from the said Lessee. In such a case,
the Lessor may charge the said sums appropriately against the amount of the
guarantee deposit.
If the rent is modified, the security deposit shall be reduced or increased so
that it always corresponds to the rent for a three-month period, net of taxes.
ARTICLE 13 - EXPENSES:
The Lessee shall pay all of the expenses, duties, and fees associated with the
present lease and any amendments or extensions hereof. All of the expenses
incurred by the Lessor in connection with proceedings undertaken against the
Lessee in order to obtain compliance with the articles, terms, and conditions of
the present lease agreement, including the expenses associated with non-judicial
actions or other actions for the same purpose, shall be reimbursed by the Lessee
upon the first request by the Lessor.
<PAGE>
-12-
ARTICLE 14 - THE V.A.T. OPTION:
Inasmuch as the Lessor has opted for the application of the Value-Added Tax
(VAT) to the present lease contract, the Lessee shall reimburse the Lessor for
the sum of the tax on the lease fee and its associated expenses, doing so when
each installment of the rent is paid.
ARTICLE 15 - ELECTION OF DOMICILE:
For the purposes of the present document, the parties elect their respective
headquarters as their domiciles.
Made in three copies, in [handwritten] Paris, on [handwritten] January 19, 1995.
FOR THE LESSOR* FOR THE LESSEE*
[handwritten] [handwritten]
Read and approved. Read and approved.
[signature] [signature]
*PLEASE PLACE THE PHRASE "READ AND APPROVED" ABOVE YOUR SIGNATURE.
<PAGE>
-13-
ATTACHMENT 1
"SET-UP SPECIFICATIONS"
PREAMBLE
The set-up activities for the premises or offices located on the floors of
high-rise buildings must comply with the regulatory provisions defined in Title
II of the Construction and Residential Code, entitled "Safety and Fire
Protection."
Accordingly, the following general conditions must be observed:
<PAGE>
SET-UP:
The set-up shall be performed in such a way that evacuations of personnel are
implemented wisely, using the common passageways and traffic paths in the
building.
The plans shall be submitted for approval by the co-ownership property manager
of the building, and the work shall not be performed until the said written
approval has been obtained.
CONSTRUCTION MATERIALS:
Two criteria shall be met:
a) FIRE RESISTANCE, for containment in relation to the common passageways,
traffic paths, and specific areas that are candidates for isolation;
b) FIRE PROOFING, for decorative and sound-related coatings and coverings,
etc.
The property management service has specialists whom tenants may consult.
ELECTRICITY:
Proprietary installations and equipment shall comply with the standards
currently effective, and in any event shall not interfere with the common
circuits in the building.
VENTILATION:
If, for reasons pertaining to operation, it is found that some areas require
specific ventilation, under no circumstances shall the common conduits or ducts
for the building be used for this purpose.
No operations shall be performed on the air-conditioning and air-purification
systems without the consent of the building's technical and safety departments.
<PAGE>
WATER:
MUNICIPAL WATER: If, in order to meet individual needs, it appears necessary
to provide more water taps in addition to the existing common installations, an
official request shall be submitted to the co-ownership Technical Department.
WASTE WATER: The same provisions set forth for municipal water shall be
observed.
ANNOYANCES CAUSED BY SET-UP ACTIVITIES:
ODORS, DUST, AND NOISE: Specific instructions shall be provided, on a
case-by-case basis, for the distribution of schedules, particularly when
noise-producing work is involved.
ASSOCIATED BUSINESSES AND/OR TRADES:
All businesses and/or trades contracted by the tenant shall be introduced by the
tenant to the property manager or to the property manager's agent, so that the
nature and duration of the work may be known, if the work will have an effect on
the common areas of the building.
The number of personnel from outside the building who will be present on the
site shall be disclosed. Safety and operating signs shall be set up for each of
the contracted businesses and/or trades.
CONDITION OF THE PREMISES:
When the occupant leaves, the property manager's department shall be charged
specifically with monitoring the proper performance of disassembly and removal
work, and particularly the work relating to the various fixtures and facilities
described in the foregoing articles.
<PAGE>
[see original for floor plan]
Accueil = Reception area
Hall = Hall
[data block]
Update following the meeting held on November 24, 1993
Update following the meeting held on November 23, 1993
Provisional issuance
Changes
Date = Date
Echelle = Scale
LAYOUT OF FURNISHINGS
DATAQUEST FRANKLIN TOWER
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF PEREGRINE SYSTEMS, INC.
Peregrine Systems GmbH (a German corporation)
Peregrine Systems Limited (an English corporation)
Peregrine Systems BV (a Netherlands corporation)
Peregrine Bridge Subsidiary (a Delaware corporation)
Peregrine Systems International Inc. (a Barbados corporation)
Peregrine Asset Management Corporation (a Delaware corporation)
Apsylog S.A. (a French corporation)
Apsylog, Inc. (a California corporation)
Apsylog GmbH (a German corporation)
AGDS S.A. (a French corporation)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 16,754
<SECURITIES> 0
<RECEIVABLES> 11,948
<ALLOWANCES> (452)
<INVENTORY> 0
<CURRENT-ASSETS> 31,334
<PP&E> 10,740
<DEPRECIATION> (6,005)
<TOTAL-ASSETS> 40,343
<CURRENT-LIABILITIES> 22,233
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 14,043
<TOTAL-LIABILITY-AND-EQUITY> 40,343
<SALES> 23,218
<TOTAL-REVENUES> 23,218
<CGS> 4,004
<TOTAL-COSTS> 53,319
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 232
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> (29,697)
<INCOME-TAX> 1,880
<INCOME-CONTINUING> (31,577)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,577)
<EPS-PRIMARY> (1.75)
<EPS-DILUTED> (1.75)
</TABLE>
